Measuring Bankruptcy Risk: Impact of Changing Accounting Methods for Intangible Assets Pre and Post A-IFRS

Abstract

The Altman (1968) bankruptcy prediction model (BPM) utilised financial statement data from manufacturing firms in the USA and has been applied worldwide without consideration of the differences in accounting practices for intangible assets (IAs). The primary purpose of this paper is to investigate the effect of the conservative accounting treatment of intangible assets on accounting ratios in Altman's (1968) BPM pre and post IFRS – specifically in Australia. A paired sample design was employed resulting in 46 bankrupt firms matched to 46 non-bankrupt firms on the basis of size, GICS Industry and principal activity. We use three strategies to measure bankruptcy risk using Australian financial data between 1996 and 2004 including (i) original unadjusted data; (ii) data adjusted excluding all IAs; and (iii) data adjusted for exclusion of all IAs except goodwill which is added back. The results support consideration of these reporting changes in future modelling of bankruptcy.