Goodwill Accounting Research Articles

Analysis of Existing Problems in Chinese A-share Market and Relevant Solutions

China's A-shares have developed rapidly in recent years, with huge market volume and scale, and have become an important direction for corporate financing and mass investment. There are still many problems in the A-share market, which will affect the development of the A-share market. There is a problem of slow delisting in the A-share market, which will lead to bad enterprises not being cleared in time, and the frequency of market update is not enough, which needs to be alleviated by further improving the legal system and changing policies. Some sectors of the A-share market have the problem of downward market, resulting in financing difficulties for companies in these sectors and unable to develop normally. This problem can be fixed by increasing the proportion of companies that pay dividends to attract investors. Listed companies in the A-share market may also have goodwill problems, which will seriously affect investor confidence and reduce the amount of investment. It is necessary to improve the goodwill accounting policy, so that goodwill can be correctly measured and reflected. Finally, A-share market funds have the problem of homogeneity, which leads to vicious competition in a single sector and is unfriendly to small and medium-sized enterprises. The government can mitigate such problems by encouraging innovation and regulating the market, diversifying stock development. It is necessary to study the problems of the A-share market and give solutions of the existing problems, which can make the country, enterprises and investors have a more intuitive understanding of the market so they can make corresponding responses to market changes.

Excess goodwill and enterprise litigation risk

Corporate mergers and acquisitions (M&A) are now a common strategic choice for enterprises. As such, goodwill, which is a core asset of M&A activities, is pivotal for financial valuation and accounting. However, the phenomenon of ‘excess goodwill’, resulting from overvaluation due to management overconfidence and performance promises, poses significant risks, including potential financial statement distortions and increased litigation. This study investigates the intrinsic link between excess goodwill and corporate litigation risk by utilising theoretical analyses and empirical tests. By analysing data from A-share listed companies in Shanghai and Shenzhen from 2007 to 2022, we employed the regression residual method to measure excess goodwill and determine its impact on litigation risk through mediating factors such as financing constraints, risk-taking and agency costs. The findings indicate that excess goodwill significantly increases litigation risk, with a more pronounced effect on manufacturing firms and those with low internal control quality. This research provides valuable insights into optimising goodwill accounting treatment and enhancing enterprise risk management practices. The study's implications suggest that stricter internal controls and cautious goodwill valuation practices are essential to mitigate risks, ultimately contributing to the stability of the capital market and the protection of investor interests.

A review of research performed on the approach to the subsequent measurement of goodwill

Orientation: By taking stock of goodwill accounting literature, the article identifies key themes and highlights the lack of innovation in goodwill and intangibles’ accounting evolution.Research purpose: This article suggests pure grounded theory research is required to develop a novel perspective on goodwill accounting.Motivation for the study: Little progress has been made to overcome the dated issues related to goodwill impairment necessitating a genuinely fresh approach.Research approach/design and method: A search was performed on the Scopus Database and all sources containing a combination of ‘goodwill’ and ‘impairment’, ‘amortisation’ or ‘depreciation’ in the title, abstract or keywords were extracted. A total of 231 sources from 1990 to 2022 are analysed. These are coded with the support of a content analysis and a bibliometric analysis.Main findings: This research identifies the dominance of positivist quantitative research and financial economics as a key issue that may be holding back progress on the subsequent treatment of goodwill. The research iterates three core issues, namely: (1) that the impairment-only approach allows too much managerial discretion, (2) an inability to reasonably estimate the useful life of goodwill deters many from supporting goodwill amortisation and (3) sometimes goodwill may be a wasting asset while others may genuinely have an indefinite useful life.Practical/managerial implications: This research may be relevant for standard setters when considering goodwill accounting methods.Contribution/value-add: The research provides insights into existing literature and highlights areas for future accounting research.

The impact of key audit matters on goodwill accounting and investment behavior: Evidence from China

This study investigates whether key audit matters (KAMs) in audit reports impact accounting for goodwill impairment and investors' decision-making. Using a matching-based difference-in-difference estimator, this study finds that small audit firms fail to compel managers to promptly impair goodwill but cause further price distortion from goodwill inflation under the KAM reporting model. Additionally, negative press coverage improves the effectiveness of KAMs disclosed by small audit firms in goodwill accounting. Finally, KAMs disclosed by small audit firms will only mislead non-professional investors. This study extends the existing research on the association between audit reports, specific reporting quality, and resource allocation in the capital market.

Is the Goodwill Impairment-Only Model Broken? An Examination of Post-Acquisition Accounting for Goodwill versus Other Intangibles

Is the Goodwill Impairment-Only Model Broken? An Examination of Post-Acquisition Accounting for Goodwill versus Other Intangibles

A Proposal for Goodwill Accounting

A Proposal for Goodwill Accounting

Goodwill Impairment Losses and Audit Fees

This paper examines whether goodwill accounting is related to auditor compensation. Specifically, it investigates whether goodwill impairment losses reported by auditees are associated with audit fees they have to pay their auditors. I predict a positive link between the amount of goodwill impairments reported by client firms and audit fees that auditors charge them. Goodwill impairment charges are likely to diminish financial reporting quality because they are susceptible to managerial opportunism and, thus, auditors are likely to consider them posing higher audit risk. Responding to higher risk of material misstatements in the financial statements of auditees, auditors are likely to increase audit effort as well as audit fees. Consistent with the prediction, the results show that goodwill impairment losses are positively associated with audit fees.

The information content of half-yearly goodwill impairment losses: analysis of the European context

PurposeThis study aims to contribute to the debate on goodwill accounting by examining the information content of impairment losses recognized in half-yearly reports. Half-yearly reports provide a suitable context to examine the effectiveness of the impairment process. Due to IFRIC 10 requirements, indeed, managers may have incentives to avoid recognizing impairment losses at the interim reporting date.Design/methodology/approachThe study adopts an archival approach. Based on the traditional Ohlson’s model (1995), it explores the information content of half-yearly impairment losses in the European context over the period 2007–2017.FindingsFindings confirm the relevance of half-yearly reports and suggest that half-yearly impairment losses are significantly associated with stock prices. In particular, investors positively value companies that recognized goodwill impairment losses at the interim reporting date.Research limitations/implicationsThe study contributes to the academic debate on goodwill and the effectiveness of the impairment procedure. In particular, it provides empirical evidence on the recognition of goodwill write-offs when it is possible to avoid the impairment test in the absence of indications of impairment.Practical implicationsFindings of this study can support the current debate on accounting for goodwill also in the light of the recent proposals of the IASB on the need to improve the effectiveness of the impairment test.Originality/valueThis study provides original empirical evidence on the goodwill impairment test in half-yearly reports, extending previous research that typically examines this issue in annual reports.

The Effect of Time Orientation in Languages on the Recognition of Goodwill Impairment Losses

Synopsis The research problem In this study, we investigated the relationship between future-time reference (FTR) in languages and goodwill impairment. Motivation Previous studies on goodwill have focused mainly on firms’ economic and reporting incentives in single-country settings using economic theories. There have been recent calls for more research on goodwill accounting across countries (d’Arcy and Tarca, 2018), and greater use of behavioral theories in goodwill accounting studies (Amel-Zadeh et al., 2021). In response, we applied the linguistic relativity hypothesis to a new and highly significant area of future-oriented behavior (impairment decision) to explain cross-country variations in goodwill impairment reporting. The test hypotheses We hypothesized that firms in countries that use weak-FTR languages have higher levels of (and greater quality) goodwill impairment than those in countries that use strong-FTR languages. Target population We used a sample of 15,179 firm-year observations taken from firms reporting under IFRS across 21 countries for the fiscal years 2005–2018. Adopted methodology We used Tobit regressions, logit regressions, mixed-effects modeling, and propensity score-matching analyses for robustness. Analyses We tested the relationship between FTR in languages and (a) goodwill impairment decisions, (b) goodwill impairment amounts, and (c) abnormal goodwill impairments. We repeated our main analyses using several subsamples, different measures of FTR, and alternative regression specifications. Findings In line with the linguistic relativity hypothesis, our findings indicate that managers who speak weak-FTR languages are more willing to bear the costs of their impairment decisions in the present and are less motivated to shift current impairment into future accounting periods. In contrast, speakers of strong-FTR languages tend to delay the recognition of current impairments to future periods to reduce their anxiety about the negative effects of current impairment decisions. Findings from further analyses indicate that firms in weak-FTR countries report lower abnormal goodwill impairment, thereby bringing impairment levels closer to their normal optimal levels. Our inferences are robust to alternative samples, different measures of FTR, and alternative model specifications.

Value relevance of goodwill accounting – how a forward-looking valuation approach guides goodwill recoverability

Value relevance of goodwill accounting – how a forward-looking valuation approach guides goodwill recoverability

Goodwill impairment, M&A, and industry development-Empirical evidence from listed companies in China.

Goodwill has been a controversial issue in China since 2007 when the new accounting standards changed the subsequent measurement of goodwill from periodic amortization to impairment testing. Using the change in subsequent measurement of goodwill, this paper examines the impact of goodwill accounting on corporate M&A and industry development. The paper finds that adopting the goodwill impairment test significantly increases firms' M&A incentives, as evidenced by a significant increase in the frequency and probability of M&A and a significant reduction in the time interval between successive M&A at the industry level. From an industrial perspective, the impairment policy has significantly improved industry concentration, total factor productivity, and competitive advantage in international trade across Chinese industries. The positive impact of goodwill impairment policy on M&A is more pronounced among firms with asset-light characteristics or high P/E ratios, and its contribution to industry competitiveness is more pronounced in asset-light or high P/E ratios industries. From the perspective of promoting capital market mergers and acquisitions and industry competitiveness, the article finds that the current goodwill impairment policy can have positive economic consequences. Our study breaks through existing perspectives to provide compelling empirical evidence for the current theoretical and practical controversy over goodwill measurement standards.

Accounting for goodwill: A literature review

This paper critically reviews the main empirical research on goodwill accounting with the purpose of informing and contributing to current debates: the application of a systematic amortisation plus an impairment when required (amortisation model) or an annual impairment-only test (impairment model). Using the main databases (ABI inform, ProQuest Central, Emerald, Science Direct, Scopus and Google Scholar), this critical review highlights the difficulty to resolve doubts at this stage. Arguments for and against the amortisation and impairment models are found. Nevertheless, going back to a systematic amortisation does not seem to be the solution but the impairment test model is eliminated. We also note that there is more room for improvement of the impairment model. Thus, we provide some guidelines and recommendations to improve it. Finally, we find that further investigation can be carried out to fill the gaps identified in the literature and we make recommendations for future research projects.

Assessment of Goodwill According to International and Russian Accounting Standards

Today the problem of accounting and reflecting business reputation (goodwill) in accounting (financial) statements remains relevant, since there are significant differences in the methodology for accounting and reflecting business reputation in Russian and international accounting (financial) reporting standards, as well as in accounting (including appraisal) practice. The article provides an up-to-date definition of the term “goodwill” (goodwill), discusses the features of accounting and reflection of positive and negative business reputation, and provides a comparative analysis of the main methods for assessing goodwill. Further, in detail, with relevant examples, the features of accounting and accounting for the impairment of goodwill in the event of the acquisition of shared ownership are considered. The calculations carried out in this article confirm the expediency of the proposed methodological analogies. The methods of accounting and evaluation of business reputation presented will allow companies’ management to better navigate the current features of goodwill accounting based on Russian and international financial reporting rules.

Framing accounting for goodwill: Intractable controversies between users and standard setters

How to account for goodwill arising from business combinations has proven to be one the most controversial topics for the standardisation, preparation, and audit of financial reports. Given its contested nature, and recent debates about improper goodwill accounting by failing companies, standard setters are currently reconsidering existing recognition, measurement, and disclosure requirements. In this study, we explore the views of a relatively neglected group of stakeholders in the financial reporting policy-making arena – financial statement users. We draw on empirical evidence from interviews with financial analysts and from responses by analysts to IASB and EFRAG consultations. We mobilise framing theory as used in public policy studies to analyse how users make sense of goodwill accounting information as compared to standard setters. Our key finding is the plurality of colliding frames between users and standard setters that remain intractable. Our analysis reveals that users’ interest in management’s accountability on acquisitions cannot fit easily into the financial reporting frame. Not only are claims by standard setters about the value relevance of goodwill impairments found not to be experienced in practice, but also we discover that users question the benefits of standard setters working in this area, while they take recourse to ‘street numbers’ for their analysis. We interpret the intractability we discover as putting into question public policy claims that accounting policies are developed with a commitment to serve the public interest.

The impact of different goodwill accounting methods on stock prices: A comparison of amortization and impairment-only methodologies

In March 2020, the IASB issued a discussion paper – ‘Business Combinations – Disclosures, Goodwill and Impairment’ – which discussed, inter alia, whether to introduce a sort of counterreformation of IAS 36 that might lead to the reintroduction of goodwill amortization. Among other things, the IASB, leveraging key findings from academic research, questioned a) the disclosure provided by entities applying IFRS 3 requirements and b) the timing of impairment write-downs and their overal11Https://www.ifrs.org/projects/work-plan/goodwill-and-impairment/#published-documents.l magnitude.The main goal of this study, focusing on a large sample of European listed companies since the adoption of IAS in 2005, is to test the value relevance of goodwill under the current accounting framework and the alternative hypothesis of an amortization regime.Our findings show that the information provided by listed companies to market investors under the current accounting regime (verification at least annually of the recoverability of the value of the goodwill carrying amount through the impairment test) – the level of goodwill before and post impairment, as well as goodwill write downs – is value relevant and contributes to explain the level of the market to tangible book value multiple. On the contrary, simulating the alternative accounting scenario of goodwill amortization, we found that the information conveyed to market investor would not be value relevant, with the amortization itself added back to the multiple. The results support the current accounting framework and indicate that the best way to improve goodwill accounting is by enforcing present rules.This study aims to provide a multidimensional contribution to the current debate within the IASB, leveraging the largest database in Europe.

Goodwill or “No-will”: Hubris in the tone at the top

In this study, we examine the effect of hubris in the “tone at the top” on goodwill accounting, specifically the proportion of the purchase price allocated to goodwill following a business combination, and subsequent decisions to write down goodwill. Using a sample of CEO letters to shareholders from firms listed on the Stockholm Stock Exchange, we carry out textual analysis of CEO letters to identify hubristic language markers. Regression analyses show that hubristic tone is positively and significantly associated with the purchase price allocation to goodwill. Furthermore, we predict that hubristic managers are more likely to overestimate future cash inflows related to goodwill and are less likely to perceive the need for a potential write-down. Consistent with this prediction, we find that hubristic tone in the CEO letters is associated with less timely goodwill write-downs. This study contributes to the literature on goodwill accounting, the role of CEO attributes on corporate decision making, and to research on CEO-speak, by providing evidence that a hubristic tone at the top can explain strategic choices by management and accounting outcomes.

The Concepts of Goodwill Accounting

The paper “The concepts of goodwill accounting” analyzes and compares several problems arising from accounting techniques concerning goodwill according International Financial Reporting Standards or Generally Accepted Accounting Standards of the United States of America. It is concentrated on evaluation of the harmonization level between these two Standards and in cases where these standards differ it tries to suggest the better solution for the selected problem. At the beginning it is oriented on the definition of goodwill in both Standards that is unfortunately not very precisely stated. On the contrary the way of its value calculation is defined very well. In the next chapters is emphasized that there is precise differentiation between accounting for goodwill existing and/or acquired in course of entity`s ordinary business activity and the ones acquired in course of a business combination. And because this segregation is respected in the rest of this paper the accounting procedures concerning goodwill identification, useful life, amortization and connected values (carrying amount, recoverable amount, fair value and the amount of net consideration transferred) are studied from this points of view too. Last but one chapter is interested in impairment of goodwill and in the end there are particular gained knowledge generalized into final conclusions.

Debt crisis, age and value relevance of goodwill: evidence from Greece

PurposeThe purpose of this study is to investigate the value relevance of goodwill and its additional aspects during a long-term period in Greece. Furthermore, by implementing two of the most popular value relevance models, the Ohlson’s price and Easton and Harris’ return model, this study examines the impact of goodwill on Greek stock prices from 2007 to 2018, a period of 12 years in which International Financial Reporting Standards (IFRS) are applied. Furthermore, this study analyzes how goodwill’s value relevance changes as it ages and during the Greek debt crisis.Design/methodology/approachIn order to test the value relevance of goodwill we implemented two of the most popular value relevance models, Ohlson’s price and Easton and Harris’ return model. Our sample consists of non-financial listed Greek companies that reported positive goodwill accounting balances on their financial statements during the financial period from 2007 to 2018. Finally, we applied fixed-effects regression model to all equations.FindingsThe results provide evidence that the year-end goodwill accounting balance is value relevant, and that the debt crisis has improved goodwill’s information content. Finally, the empirical findings suggest that only current year acquired goodwill is value relevant compared to older goodwill, and therefore, goodwill’s impact on stock prices is decreasing as it ages.Research limitations/implicationsA noteworthy limitation of this study is that it focuses on a specific code-law country Greece, which is a relatively small economy compared to the whole Eurozone. This research contributes to the research literature as it confirms other research findings in the European context and specifically that goodwill based on IFRS is value relevant to financial statement users. Additionally, it investigates for the first time how goodwill was affected by the Greek debt crisis. Finally, it contributes to other researcher’s debate concerning the duration of goodwill’s value relevance in a code law environment such as Greece.Practical implicationsFinancial analysts and institutions are provided with more assurance about goodwill’s financial reporting quality to be embedded in the financial evaluation process of corporates. As this research confirms that goodwill should be regarded as an asset, companies should obtain better financial ratings from financial institutions and investors and thus will have better access to equity and debt funding.Originality/valueWe investigate the value relevance of goodwill in Greece during a long-term period of 12 years. Additionally, our study examines the impact of the Greek debt crisis on the information content of goodwill accounting balances and the period during which accumulated goodwill balances and within-year acquired goodwill maintain its value relevance. Our research could assist accounting standard setters such as the International Accounting Standard Board to evaluate the quality of specific standards such as IFRS 3 “Business Combination” and IAS 38 “Impairment of Assets.”

Empirical Goodwill Research: Insights, Issues, and Implications for Standard Setting and Future Research

This paper reviews the empirical literature on the determinants and decision usefulness of goodwill reporting. We structure our discussion around five guiding questions that reflect longstanding policy issues: recognition, initial and subsequent measurement, disclosure, and the role of governance and monitoring. In addition to summarizing the findings, we assess the validity of the evidence. Our review indicates that goodwill amounts, on average, are associated with the underlying economics of the combining firms but are also shaped by managerial incentives and institutional context. Empirical research does not allow us to conclude whether current goodwill accounting rules provide for an optimal degree of discretion. Nonetheless, our analysis yields a number of policy implications and research suggestions. In addition to pointing out new research questions that could be addressed by further archival research, we advocate reproduction studies to test the generalizability of existing findings across contexts, and we encourage standard setters to initiate quasi-experiments to generate causal evidence and to render policymaking more accountable. We further suggest that researchers make more use of behavioral theories and non-archival methods to elucidate the motives and interactions of decision-makers in goodwill accounting.

Response by the Financial Reporting Policy Committee of the Financial Accounting and Reporting Section of the American Accounting Association to the FASB Invitation to Comment on Identifiable Intangible Assets and Subsequent Accounting for Goodwill

SYNOPSIS In October 2019, the Financial Reporting Policy Committee of the Financial Accounting and Reporting Section of the American Accounting Association submitted a comment letter to the Financial Accounting Standards Board regarding the accounting for certain identifiable intangible assets acquired in a business combination and subsequent accounting for goodwill. This paper summarizes the content of the comment letter and discusses opportunities for future research on intangible assets that may inform accounting standard-setting decisions. JEL Classifications: M40.