The Determinants of Goodwill Reinstatements: Assessing the Implications of IFRS 1

Abstract

This study aims to examine the determinants that affect UK firms' choices to retrospectively reinstate acquired goodwill as an intangible asset when it was reported as an equity deduction in the balance sheet. While most firms choose exemption from the retrospective application, some firms opt for costly reinstatement when they first adopt UK FRS 10. Empirical results indicate that companies with high debt contracting costs choose the retrospective application, in line with the ”debt contract hypothesis.” However, none of the hypotheses concerning ”signaling theory,” ”political cost,” and ”equity contracting” are supported by the findings. The sampled firms reinstate goodwill with the incentive to reduce the financial distress costs and to increase the possibility of renegotiating new debts in the future. As the requirements of goodwill accounting for UK FRS 10 and IFRS1 are similar, the UK procedures and experiences for goodwill accounting provide good models for Taiwan, where the first adoption of IFRS is expected to take place in 2013. In addition, exemptions from retrospective application could possibly provide companies leeway for manipulation during the transitional period of IFRS adoption.