The Quality of Mandatory Disclosure: the Impairment of Goodwill. An Empirical Analysis of European Listed Companies

Abstract

The paper presents the results of an empirical analysis on the quality of the mandatory disclosure of IAS 36 – impairment of assets. The analysis focuses, in particular, on the disclosure of goodwill.The aim of the paper is to verify if companies disclose the information required by IFRS on the impairment of goodwill. The international financial crisis has lead many companies to recognize impairment losses on goodwill or to verify twice (or more) a year whether impairment losses were generated. The increasing relevance assumed by goodwill in the financial statement of companies has led disclosure to become an extremely important issue. IAS 36 defines that companies shall disclose, among others, the carrying amount of goodwill allocated to the cash generating unit (CGU), the basis on which the unit's recoverable amount has been determined, the discount rate applied to the cash flow projections, etc. Many studies have been conducted on the quality of voluntary disclosure of impairment and the results show that the disclosure index is very low. Thus, our paper aims at verifying if, first of all, the mandatory disclosure is shown in the notes of the consolidated financial statement. Consequently, an empirical analysis was carried out of the consolidated financial statements of the groups listed on the Italian, French, German and Spanish Stock Exchanges and belonging to the main indexes of the above-mentioned markets (FTSEMIB40, CAC40, DAX30, IBEX35). The sample is made up of 141 consolidated financial statements referring to the year 2010. The methodology of research is based on the use of the disclosure index (Botosan, 1997). The results are surprising: they show that the disclosure index is very low and there are wide differences between the stock markets analyzed. A question arises from the evidence: why is the quality of mandatory disclosure so poor? Standard setters, practitioners and academics must deal with this topic.