Relationship between IFRS Voluntary Adoption and Goodwill

Abstract

This paper analyses the role goodwill plays as Japanese firms make decisions of IFRS voluntary adoption. Considering that IFRS do not require regular amortization of goodwill as Japanese GAAP do, it assumes (1) firms with a larger amount of goodwill are more likely to adopt IFRS, and (2) those who adopted IFRS proactively conduct M&As resulting in the increase in goodwill. It first determines the factors promoting IFRS voluntary adoption using logit model. Then, based on the model, it constructs propensity score-matched sample of IFRS adopters and non-adopters and tests the difference in difference of the amount of goodwill. The analyses prove first the amount of goodwill, as well as R&D expenses ratio, foreign sales ratio and firm age, affects the propensity of IFRS voluntary adoption. They also prove IFRS voluntary adopters increase the amount of goodwill in parallel with the decision making of voluntary adoption.