Abstract
Purpose – To analyze the extent to which recognition of impairments in goodwill is associated with periods of negative results before these losses (big bath practices). To determine whether indebtedness and the capital market restrict the recognition of such losses in big bath practices. Design/methodology/approach – Quantitative empirical study based on accounting and market data of companies listed on the Lisbon and Madrid stock exchanges (2007-2015), supported by multivariate regression models estimated using the generalized moments method (system GMM). Findings – Impairment in goodwill is relevant in big bath practices, and there is great discretion in the use of this accrual. It can be concluded that companies adjust to capital market cycles. The positive relationship between the level of indebtedness and the impairment in goodwill suggests that any penalties from creditors do not condition the recognition of the impairments. Originality/value – There is evidence of big bath practices being associated with companies with negative results and of the role of debt and capital markets as explanatory factors of big bath strategies that use impairments in goodwill.
Highlights
IntroductionThe recognition of impairment losses in goodwill (designated by Imp_GW) appears in the literature because of the loss of capacity to generate cash in the future (Brütting, 2011; Olante, 2013)
The recognition of impairment losses in goodwill appears in the literature because of the loss of capacity to generate cash in the future (Brütting, 2011; Olante, 2013).The verification and quantification tests of Imp_GW, according to International Accounting Standard (IAS) 36, have economic impacts (Harris & Caplan, 2002), with reflections on the value of the company and the likelihood of recognizing the loss, its amount, and its timing. Ramanna and Watts (2012) identify three aspects that introduce high discretion into the recognition of Imp_GW: (i) GW’s effect on cash-generating units, (ii) estimation of the deducted value of future cash flows, and (iii) determination of fair value of assets and liabilities.There is evidence of opportunistic earnings management through Imp_GW
Big bath practices and income smoothing depend on a set of factors, in addition to the accounting choice permitted by the standards
Summary
The recognition of impairment losses in goodwill (designated by Imp_GW) appears in the literature because of the loss of capacity to generate cash in the future (Brütting, 2011; Olante, 2013). The companies apply international accounting standards / international financial reporting standards (IAS / IFRS) and are influenced by code law in both countries (Knobble & Parker, 2004), there is evidence (e.g., Fernandes, Gonçalves, Warrior & Pereira, 2016) of more conservative accounting behavior regarding the recognition of Imp_GW, in some companies, justifying some interest in this comparative analysis. This study contributes to the literature in two ways: (i) by comparatively analyzing big bath practices in two countries, which apply the same accounting standards (IAS/IFRS) and are influenced by code law; (ii) by analyzing constraints to big bath practices that use Imp_ GW, such as debt and capital markets. The study encourages those bodies responsible for accounting standardization to analyze the efficiency of the mechanisms involved in the recognition of Imp_GW, by pondering regulatory solutions to minimize the degree of discretion associated with the timing and value of these losses and thereby improving the credibility of financial information.
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