The impact of IAS 36 on goodwill disclosure: Evidence of the write-offs and performance effects

Gabriele D'Alauro

doi:10.3926/ic.415

Abstract

Purpose: This paper aims at examining the quality of corporate disclosure about goodwill impairment and its relationship with goodwill write-offs and earnings performance, exploiting an accounting regulation that allows significant unverifiable estimates whilst requires a high level of information. Design/methodology/approach: This study, based on a sample of Italian and British firms with market indications of goodwill impairment, verifies through a both univariate and multivariate analysis whether the level of disclosure is positively related to the magnitude of goodwill write-off and to earnings performance, using a self-constructed score of mandatory disclosure about goodwill impairment tests in accordance with IAS 36 requirements. Findings: In a general context of insufficient information, we find that for Italian firms both the magnitude of goodwill write-offs and earnings performance are significantly and positively associated to the level of mandatory disclosure about goodwill impairment tests. For the British firms, as companies more used to impairment test rules, the data does not confirm any significant association. Research limitations/implications: The objective of this study is to test the initial impact of IAS 36 in the first years of its application, selecting a sample of firms belonging to limited but significant activity sectors. Future research could usefully analyse a wider sample of firms, also extending the time period of analysis. In any case, the findings of our study are consistent with the insights of earnings management theory, suggesting that the subjectivity inherent in impairment test assumptions could be used opportunistically by managers. Originality/value: This research investigates questions still relatively unexplored, concerning the effects of goodwill write-offs and accounting performance on corporate disclosure about goodwill impairment test. Based on this analysis, the study shows that corporate disclosure could be a “litmus paper” able to test the degree of good faith with which each firm has implemented IAS 36 requirements.

Highlights

There is an ongoing debate on the importance of goodwill accounting
The study shows that corporate disclosure could be a “litmus paper” able to test the degree of good faith with which each firm has implemented IAS 36 requirements
Using a sample of Italian and British listed firms with market indications of goodwill impairment, this paper examines whether the quality of disclosure about a goodwill impairment test is related to the magnitude of goodwill write-off

Summary

Introduction

There is an ongoing debate on the importance of goodwill accounting. The Financial Accounting Standards Board (FASB) has sought to improve the relevance of this issue by moving towards goodwill impairment rules with SFAS 142 – Goodwill and Other Intangible Assets (FASB, 2001). IAS 36 – Impairment of Assets (IASB, 2004) eliminates goodwill amortization, requiring instead that goodwill be evaluated at least annually for possible impairment. In the light of IAS 36 requirements, as well known, an impairment test is based on a chain of significant assumptions, with reference, for instance, to cash generating units identification, discount rates estimate, growth rates appraisal. Such a degree of allowable discretion, as earnings management theory predicts, could be used opportunistically by managers (Watts, 2003; Quagli & Meini, 2007). The level of impairment disclosure required by IAS 36 is considerably high, regardless of whether goodwill write-offs are recorded or not

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