Abstract
This study contributes to the issue of accounting for goodwill by examining the impact of changing from the Australian Generally Accepted Accounting Principles (AGAAP) to Australian International Financial Reporting Standards (AIFRS) on goodwill, 3 years (2002 to 2004) before and 3 years (2006 to 2008) after AIFRS adoption. The sample is drawn from top 200 companies listed on the Australian Stock Exchange (ASX). This study applies multiple regressions. The dependent variable is the closing share price 3 months after the balance sheet date. The independent variables consist of earnings per share, book value per share, goodwill in the balance sheet, goodwill in the income statement (goodwill amortisation and goodwill impairment) and goodwill acquisition. The findings indicate that goodwill accounted for in the income statement and balance sheet do not provide increased explanatory power of market value under AIFRS compared to AGAAP. Moreover, the goodwill in the income statement does not show value relevance in year 2007, but became significant in year 2008 during the global financial crisis (GFC). Also, the age of goodwill recorded in the balance sheet does not affect the value relevance of earnings and book value in the post-adoption period. This study contributes new evidence on accounting for goodwill under pre and post-IFRS accounting regimes in Australia. This is also the first study to examine the separate effects of goodwill accounting on earnings and net assets, with special attention given to the period before and during the GFC in capital markets.
Highlights
The issue of accounting for goodwill has been debated in many countries, with opinion changing several times as reflected in past reissues of exposure drafts and accounting standards on goodwill by various standard setting bodies
For Australian Generally Accepted Accounting Principles (AGAAP), adjusted R2 shows that share price accounts for 61.3% of the variation in the model; by comparison, for Australian International Financial Reporting Standards (AIFRS), adjusted R2 shows that share price accounts for 59.9% of the variation in the model
Earnings, book value of net assets, goodwill in net assets and goodwill in net income have each retained their value relevance under AIFRS and AGAAP. Since this result reveals that goodwill accounted for in the income statement and balance sheet do not provide increased explanatory power of market value in the post-IFRS period, Hypothesis 1 is rejected
Summary
The issue of accounting for goodwill has been debated in many countries, with opinion changing several times as reflected in past reissues of exposure drafts and accounting standards on goodwill by various standard setting bodies. An unsettled position or a laissez-faire position by standard setters on goodwill accounting over the past has encouraged companies’ management to select the treatments that give them the most desired financial results. These abuses have been well documented (Godfrey and Koh, 2001; Chalmers and Godfrey, 2006; Wines et al, 2007). As stated by Godfrey and Koh (2001), the debate (about goodwill accounting) is an interesting exercise, its real importance can only be appreciated if the accounting (for goodwill) affects real economic decisions. If accounting for goodwill affects firm valuations, it provides financial information that is relevant to financial statement users and is said to be value relevant (Barth, 2000)
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