Discount Rates in Disarray: Evidence on Flawed Goodwill Impairment Testing

Abstract

Carlin and Finch, this issue, compare goodwill impairment discount rates used by a sample of large Australian firms with ‘independently’ generated discount rates. Their objective is to empirically determine whether managers opportunistically select goodwill discount rates subsequent to the 2005 introduction of International Financial Reporting Standards (IFRS) in Australia. This is a worthwhile objective given that IFRS introduced an impairment regime, and within this regime, discount rate selection plays a key role in goodwill valuation decisions. It is also timely to consider the goodwill valuation issue. Following the recent downturn in the economy, there is a high probability that many firms will be forced to write down impaired goodwill arising from boom period acquisitions. Hence, evidence of bias in rate selection is likely to be of major concern to investors, policymakers and corporate regulators. Carlin and Finch claim their findings provide evidence of such bias. In this commentary I review the validity of their claims.