Impairment of Goodwill: Level of Compliance and Quality of Disclosure during the Crisis-An Analysis of Italian Listed Companies

Maria Federica Izzo,Elisa Sartori,Valerio Luciani

doi:10.5539/ibr.v6n11p94

Abstract

This paper investigates the level of disclosure on impairment test of goodwill in the Italian context. The research is based on the analysis of the consolidated financial statements 2007–2011 of companies listed on FTSE MIB of Milan Stock Exchange at 31st December 2012. The main objective of the research is to verify if financial crisis has impacted on the level of compliance with IAS 36 and Guidelines issued by Italian Authorities. In addition, it tests if there are any relations between the level of disclosure and factors such as market capitalization, the ratio Goodwill on Equity and Impairment loss/Goodwill. Our results show that the quality of disclosure is still incomplete, even if it is clear that there is a significant improvement in the period covered by the analysis. In addition, we observe that, at least in relation to our data, there is no relation between the quality of mandatory disclosure on goodwill and the mentioned factors.

Highlights

In 2011 Italy has been the European country that has most impaired assets recognized in the financial statements of listed companies
From the analysis of financial statements of listed companies included in the sample and for the years 2007–2011, it is evident that the quality of disclosure on the impairment test of goodwill-evaluated in terms of compliance with the requirements of IAS 36 and with the guidelines recommended by the Authority and the national standard-setter— it is still very incomplete
Even if it is never achieved full compliance, the positive evolution of the mean score of level of disclosure from 2007 to 2011 shows, as expected, a greater sensitivity of companies that are willing to render easier the process of investors assessing the reliability of estimates made for the purpose of impairment testing

Summary

Introduction

In 2011 Italy has been the European country that has most impaired assets recognized in the financial statements of listed companies (mainly goodwill). Goodwill is one of the most controversial company assets, and this controversial nature is not just related to its definition and to its quantification and accounting treatment (Bloom, 2009). The impairment test procedures represent one of the most critical aspect of IAS/IFRS implementation (IFRS Foundations, 2013a), both for the high complexity and subjectivity of the evaluation process required by IAS 36, Impairment of assets (International Accounting Standard Board (IASB), 2004a) and for the incidence of these intangible assets in companies’ financial statements (in relation to total assets, equity and market capitalization). That leads to an increase, at least hypothetically, in the probability that the Cash Generating Unit (CGU) carrying amount is less than its recoverable amount

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Conclusion