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The Goodwill Impairment Test under IFRS: Objective, Effectiveness and Alternative Approaches
... Our analysis further identifies situations where the PH model is "over-effective". The framework is also used to illustrate the effectiveness of the current IFRS model compared to a goodwill amortization model [6]. ...
... While the expected frequencies in each cell must be minimal, there are no constraints on the size of the observed frequencies. According to the predominant opinion, observed frequencies shouldn't be less than (6) in any cell. ...
... B-The chi-square the following tables is used to preview the calculated value with the theoretical value if the number of samples or tests exceeds (3), and the number of items for each sample must be no less than (6). ...
International accounting standards require, in particular the impairment of (36) asset value standard No (31), re- evaluation of assets to display the value of fair value as the replacement value at the end of the period or fiscal year of the disclosure of assets, real value, the represent philosophy of accounting to relevant of different models to call the fair values, especially in case of using methodology - based pricing capital asset model. The researcher presented a model for measuring the impairment of the book value of assets form, which contributes to the measurement of accuracy of the fixed measurement of accounting income and taxable income help guide the preparation of financial statements in the presentation of fixed assets as fast as they converge with the fact that revenue and economic benefits of the asset in the financial period is ending. Because the accounting incases always different on taxable income for the application of the income tax act, although the act, to impose tax in net profit, which present the income statement prepared in accordance with the Egyptian accounting standards, but on grounds of maintaining the public revenues of ministerial decisions were issued contrary to that application and became the standard (31) can’t be applied when determining the tax base. Which led to a loss in its submission for income tax, which is a clear challenge, there is no application of some financial standards, which is what the researcher tried to show. He presented it to determine the tax impact of not applying the standard.
... We, therefore, explore the implications of IFRS 3 goodwill accounting rules on managerial behavior by assessing how it is affected by postacquisition fair value adjustments and impairmentonly approach. From a conceptual standpoint, we build on prior studies (Churyk, 2005;Zhang & Zhang, 2007;Anwar & Suryaningrum, 2013;Shalev, 2009;Hellman & Hjelström, 2023) and explore the relationship between the purchase price and goodwill and the effect of goodwill on impairment losses and net income. ...
Goodwill is a critical issue in the accounting of corporate restructuring activities in terms of both purchase price allocation in corporate acquisitions and the subsequent write-downs. Although the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) new accounting standards provide a reference point for goodwill recognition, the complexity of fair value adjustments and the extensive subjectivity involved in assessing goodwill still make its allocation and the impairment-only approach limitedly transparent. Therefore, this study explores the impact of IFRS 3 (International Financial Reporting Standard 3) on management discretion in goodwill reporting. From a methodological standpoint, the hypotheses are tested on a sample of 68 acquisitions executed by Italian-listed acquirers in the 2012–2020 period. Our results confirm the potential for managerial opportunistic behavior in light of the signaling role of goodwill for investors.
Goodwill is generated when one firm merges with another one. When the amount spent on acquiring something is higher than the estimated worth of its assets, it is recorded as goodwill on the financial statement. In the past, goodwill used to be amortized. However, modern procedures now require annual impairment testing, which considers the belief that goodwill has an unlimited life and continued economic value. This study explores the disclosure of goodwill and impairment in technology companies in Indonesia and analyzes the consistency of goodwill impairment reporting under PSAK 48. The study also seeks to understand how technology companies in Indonesia apply accounting standards related to goodwill and its impact on financial statements and company performance. This work employs a qualitative research approach, utilizing data sources from a scoping evaluation of previous research on goodwill. This study demonstrates that the laws regulating goodwill have undergone many revisions, and goodwill is currently recognized as an asset obtained through a corporate merger. It is necessary to assess the impairment of goodwill annually. This research is anticipated to contribute to the existing knowledge on goodwill within financial accounting literature or academic scholarship framework.
Introducción. Es deber del Consejo de Normas Internacionales de Contabilidad publicar e informar a los usuarios interesados sobre diversos temas contables. La norma responsable que ilustra sobre los activos − que son componentes preponderantes de la contabilidad− es la NIC 36. Objetivo. Analizar el deterioro del valor de los activos −el alcance− es identificar el mayor valor módico menos los costos de disposición y el valor en uso. Materiales y métodos. Para elevar el nivel de contribución se utiliza material científico que sirve para propiciar nuevas teorizaciones. Los métodos que se utilizan son el valor de plaza libre y el matemático financiero que juntos propician la técnica del valor razonable para garantizar que el registro en el sistema contable de un activo no supere la tasación recuperable. Resultados. Este aporte garantiza que las propiedades de las corporativas no se registren a una cantidad mayor del que se espera recuperar. Así pues, la NIC 36 se utiliza para reconocer una gama de activos excepto estos que están sujetos a deterioro según otras normas. Esta contribución resalta cómo calcular el importe que se espera recuperar de los bienes, así como explicar los componentes a considerar para una posible recuperación del valor de los bienes en los que se ha perdido valor. Conclusiones. En esta parte del manuscrito se registran los elementos comunes y las discrepancias que dieron origen a la problemática −la pérdida del valor monetario de los bienes−, por otra parte, se deja abierta la posibilidad de una posible reversión de la pérdida, debido a mejoras en el futuro en la plaza activa.
Purpose
This study aims to contribute to the debate on goodwill accounting by examining the information content of impairment losses recognized in half-yearly reports. Half-yearly reports provide a suitable context to examine the effectiveness of the impairment process. Due to IFRIC 10 requirements, indeed, managers may have incentives to avoid recognizing impairment losses at the interim reporting date.
Design/methodology/approach
The study adopts an archival approach. Based on the traditional Ohlson’s model (1995), it explores the information content of half-yearly impairment losses in the European context over the period 2007–2017.
Findings
Findings confirm the relevance of half-yearly reports and suggest that half-yearly impairment losses are significantly associated with stock prices. In particular, investors positively value companies that recognized goodwill impairment losses at the interim reporting date.
Research limitations/implications
The study contributes to the academic debate on goodwill and the effectiveness of the impairment procedure. In particular, it provides empirical evidence on the recognition of goodwill write-offs when it is possible to avoid the impairment test in the absence of indications of impairment.
Practical implications
Findings of this study can support the current debate on accounting for goodwill also in the light of the recent proposals of the IASB on the need to improve the effectiveness of the impairment test.
Originality/value
This study provides original empirical evidence on the goodwill impairment test in half-yearly reports, extending previous research that typically examines this issue in annual reports.
This paper reviews the empirical literature on the determinants and decision usefulness of goodwill reporting. We structure our discussion around five guiding questions that reflect longstanding policy issues: recognition, initial and subsequent measurement, disclosure, and the role of governance and monitoring. In addition to summarizing the findings, we assess the validity of the evidence. Our review indicates that goodwill amounts, on average, are associated with the underlying economics of the combining firms but are also shaped by managerial incentives and institutional context. Empirical research does not allow us to conclude whether current goodwill accounting rules provide for an optimal degree of discretion. Nonetheless, our analysis yields a number of policy implications and research suggestions. In addition to pointing out new research questions that could be addressed by further archival research, we advocate reproduction studies to test the generalizability of existing findings across contexts, and we encourage standard setters to initiate quasi-experiments to generate causal evidence and to render policymaking more accountable. We further suggest that researchers make more use of behavioral theories and non-archival methods to elucidate the motives and interactions of decision-makers in goodwill accounting.
How to account for goodwill arising from business combinations has proven to be one the most controversial topics for the standardisation, preparation, and audit of financial reports. Given its contested nature, and recent debates about improper goodwill accounting by failing companies, standard setters are currently reconsidering existing recognition, measurement, and disclosure requirements. In this study, we explore the views of a relatively neglected group of stakeholders in the financial reporting policy-making arena – financial statement users. We draw on empirical evidence from interviews with financial analysts and from responses by analysts to IASB and EFRAG consultations. We mobilise framing theory as used in public policy studies to analyse how users make sense of goodwill accounting information as compared to standard setters. Our key finding is the plurality of colliding frames between users and standard setters that remain intractable. Our analysis reveals that users’ interest in management’s accountability on acquisitions cannot fit easily into the financial reporting frame. Not only are claims by standard setters about the value relevance of goodwill impairments found not to be experienced in practice, but also we discover that users question the benefits of standard setters working in this area, while they take recourse to ‘street numbers’ for their analysis. We interpret the intractability we discover as putting into question public policy claims that accounting policies are developed with a commitment to serve the public interest.
SYNOPSIS
This paper evaluates whether alternative methods of subsequent accounting for goodwill result in accounting numbers that are significantly different from previous methods prescribed by standard setters. Financial statement users have identified significant flaws in both the amortization-and-impairment and impairment-only methods of subsequent accounting for goodwill. In this paper, we (1) summarize the current debate over subsequent accounting for goodwill, (2) empirically examine the decline in goodwill value under the amortization-and-impairment and impairment-only regimes, and (3) empirically investigate whether there are alternative methods that result in significantly different rates and patterns of decline in the value of goodwill (and thus have the potential to address the identified weaknesses of each method). We conclude that the proposed alternative methods provide markedly different patterns and periods over which goodwill is written off and, therefore, have the potential to provide a more faithful representation of the economics of goodwill.
Data Availability: Data are available from the public sources cited in the text.
The transition from amortization to the impairment-only approach in IFRS 3 and CAS 8 (China's accounting standards) increased managerial discretion when estimating goodwill impairment write-offs, leading to potential earnings management. We assess whether and how managers manipulate goodwill impairment under the influence of analyst coverage in China. Securities analysts serve as external monitors, deterring managers from avoiding goodwill impairment recognition, but analysts might also pressure managers, resulting in understated goodwill impairment and inflated earnings. Using a unique sample of listed firms in China, we find that analyst coverage associates negatively with goodwill impairment, consistent with pressuring from securities analysts. Additionally, the pressure is driven by optimistic forecasts and is more likely to encourage impairment manipulation than real earnings management. We further find that the relationship is weakened in more transparent information environments, measured by firm size, audit quality, and disclosure ratings. Findings are consistent after controlling for potential endogeneity.
This study investigates the determinants of goodwill impairment decisions by firms applying IFRS based on a comprehensive sample of stock-listed firms from 21 countries. Multivariate logistical regression findings indicate that goodwill impairment incidence is negatively associated with economic performance, but also related to proxies for managerial and firm-level incentives. In addition, whereas goodwill impairment tends to be timely for firms in high enforcement countries, firms in low enforcement countries tend to be less responsive to declines in the economic value of goodwill; CEO compensation concerns affect the impairment decision for firms in low enforcement; and CEO reputation concerns and management preference for smooth earnings influence goodwill impairment decisions in high, as well as low, enforcement countries. We also find that private monitoring through institutional investors substitutes for public enforcement in the context of goodwill impairment when a country's enforcement regime is relatively weak.
In 2005, the International Financial Reporting Standards (IFRS) for goodwill accounting replaced the previously used two-component approach (i.e., goodwill amortization plus additional impairment when required) with an impairment-only approach. There has been renewed interest in this issue since the findings of the post-implementation review of IFRS 3. This paper develops a theoretical model of the initial and subsequent accounting for goodwill, that is usable for evaluating the relevance of different standard-setting solutions in this area. The model indicates that the current impairment-only approach creates a buffer that protects accounting goodwill from impairment. The buffer is created as a result of both internally generated core goodwill and the fair value of assets/liabilities not recognized on the statement of financial position. In turn, the impairment test will understate the economic loss and serve as a weak indicator of acquisition success/failure. Based on our model, we propose changing the impairment test procedure so that the same measurement and recognition criteria are employed as at initial recognition. Consequently, the representation of goodwill on the statement of financial position, and the effectiveness of goodwill impairment losses as an indicator, would improve.
SYNOPSIS
The costs and benefits of implementing International Financial Reporting Standards (IFRS) in practice can now be examined as more countries adopt IFRS. Our survey-based study provides unique insights into the perceptions of the preparers of 305 Australian company financial reports, when companies were preparing Australian equivalents to IFRS financial statements for the first time. We analyze preparers' perceptions of the costs of the implementation process and the likely benefits arising for their companies. Our results reveal a very negative tone among respondents reflecting concerns about the problems of IFRS implementation and the low level of expected benefits. We show that the primary sources of these concerns about IFRS were the difficulties associated with specific accounting issues, the ongoing monetary costs involved, and the perceived limited capital market impact of the changes introduced.
Data Availability: Data used in the study are available from the authors upon request.
This paper provides an overview of why, and how, academic research can assist regulators and standard setters in evaluating ex ante and ex post the effects of standardization and regulation of corporate financial reporting and disclosure. We argue that academic research is a valuable and often underutilized resource that can help standard setters and policymakers understand the possible effects of accounting standards and regulations. We give an overview of approaches that can, and are, used for this objective and provide selected examples to illustrate how academic research can inform standard setters and regulators.
The purpose of this commentary is to address the issues raised by Ohlson from the point of view of analytical accounting research. The aim is not only to provide some input to young researchers who are going to publish good research using analytical methods, but also to give some hints to help users of analytical accounting research to understand and interpret the findings of this type of research. Ohlson has taken on a task of identifying a set of critical factors which are likely to lead to successful research. Good research is defined as research that makes an impression. Thus, it is not enough to get the research published - not even in a premier journal. The research should have an impact, the community should learn something. As Ohlson notes, there is enough 'ordinary' research. In my view this is the right attitude. Short-term optimization is also widespread in the research community and that is not what we should strive for. With the objective in place, I will continue to analyze the question in relation to analytical research. I start out discussing the aim of analytical research by providing a few examples of good models. The first is the Feltham-Ohlson model and the second is the agency model. Both are simple and elegant models dealing with difficult issues. The analysis proceeds to characterize good models. A good model is a simple model that zooms in on the problem under scrutiny. It is a 'minimal' model that contains the problem and nothing outside the problem. I then proceed to characterize good research in an analytical framework. This is research that tackles a problem that is of interest to the users and the researcher. In this process I also identify current notable analytical research. Finally, I contrast this to the recommendations of Ohlson.
A cross-firm consistent application of accounting standards is sought in all major accounting regimes. Since many transactions and events are only vaguely or not explicitly addressed in the standards managers must often use judgment when applying accounting standards to particular transactions or events. This analysis concludes that a consistent application of accounting standards can only be ensured if the accounting standards themselves are internally consistent. By contrast, inconsistent standards - in the absence of clear guidance - permit managers to (more or less arbitrarily) choose between different accounting methods. Moreover, it is found that a consistent application presupposes the existence of specific guidance (‘rules’) in order to frame management's judgment. It is argued that the reliance on principles only - as requested by many in the accounting literature - fails to ensure a consistent application because it allows management to exert judgment differently in identical cases. The assessment includes arguments and propositions from the international discussion in the accounting literature and also refers to other related fields of research, such as legal theory.
Has goodwill gone bad?
- Li
Accounting for asset impairment: A test for IFRS compliance across Europe. Centre for Financial Analysis and Reporting Research, CeFARR
- H Amiraslani
- G E Iatridis
- P F Pope