Advance Australia Fair: The Quality of AASB 136 Fair Value Disclosures Down Under

Abstract

The introduction of an impairment test for goodwill under IFRS is seen as another step toward moving financial accounting and reporting from its traditional historical cost paradigm to one of fair value. This regulatory change has been the subject of a growing body of literature which has often criticised many of the technical aspects of the new standard and highlighted the increased discretion it has afforded managers in the determination of periodic profit. One example of this increased discretion is the opportunity to undertake an impairment test using a methodology based on value in use or fair value less cost to sell. While previous empirical studies examining the contemporary practice of goodwill impairment testing in Australian have focused on the large number of firms that have elected a value in use methodology, this paper examines the less popular practice of impairment testing using fair value less cost to sell by drawing from a sample of 200 of the largest Australian firms. One average, these firms tended to have greater levels of goodwill suggesting a higher potential sensitivity to impairment losses, yet they recorded a lower incidence of impairment recognition compared to those firms using a value in use methodology. Our analysis also identifies a systematic failure among these firms to comply with the basic disclosure requirements required under the standard which increases the likelihood of unverifiable estimates polluting financial statements. Our results assist in understanding the impact the introduction of IFRS brings to the reliability of financial reporting in Australia, and identifies issues that may assist regulators and standard setters in shaping future policy.