Does amortization of goodwill effect on companies' profits and future cash flows?

Kazuhiko Kobori

doi:10.20525/ijrbs.v9i5.842

Abstract

The International Accounting Standards Board (IASB) will discuss whether or not accounting rules for M&A change, and it plans to draw a conclusion in 2021. In view of this fact, it is considered that a series of large M&A have significant effects on corporate earnings worldwide. This paper examines whether the amortization and/or non-amortization of goodwill affect companies’ earnings and future cash flow, an analysis for which there are two reasons. First, IFRS initiates the debate on the premise of goodwill amortization. If goodwill is amortized, it will have a profound impact on corporate profits and cash flow. Second, M&A has recently increased in Japan due to the increase in retained earnings and because IFRS has not requested goodwill amortization. The conclusion is as follows: First, it has become clear that legally retained earnings accelerate M&A because they affect the future goodwill along with both accounting standards. Next, the results revealed that the amortization of goodwill corresponds with the future ROA in conformity with Japanese accounting standards. On the other hand, this study did not determine that goodwill affects ROA in IFRS companies. Particularly, IFRS firms invested greater amounts of money than did Japanese accounting firms. Therefore, IFRS firms' goodwill might not be effective applied to M&A within four years.

Highlights

Due to the declining population, various adverse effects are emerging in Japan
This research examined whether the amortization and/or non-amortization of goodwill affect future profits and cash flows
It has become clear that legal RE accelerate merger and acquisition (M&A) because they affect the future goodwill along both accounting standards

Summary

Introduction

Due to the declining population, various adverse effects are emerging in Japan. For example, the Ministry of Finance is concerned that tax revenue will decline. The amount of M&A generated by Japanese companies totalled $122 million during the first half of 2018, which was recorded as the highest amount ever generated in Japan This amount exceeded the European firms’ M&A amount (The Nikkei, 2018 September 13). Unlike the IFRS, Japanese accounting standards require companies to amortize goodwill on an annual basis and to complete the amortization process within twenty years. Japanese companies have frequently conducted M&A because, when using IFRS, it is not necessary that expenses be recorded by the amortization of goodwill for every accounting period. If IFRS requests the amortization of goodwill, it will have more direct significant impact on corporate profits in areas such as Europe, the US, Taiwan, Japan, and Mainland of China. This is a necessary research direction that may minimize the influence of goodwill amortization when IFRS decides to implement the process

Literature Review

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