Accounting Treatment Of Goodwill Research Articles

WHAT DETERMINES THE APPLICATION OF IFRS 3 IN ACCOUNTING FOR GOODWILL?

Accounting treatment of goodwill is often described as one of the most complex and controversial topics in the field of financial reporting, so it is of primary interest to examine the factors that affect application of IFRS 3 in Serbia given the low quality of financial reporting in developing countries to which Serbia belongs. Paper results show low quality of financial reporting on domestic business combinations which is an indicator to professional and regulatory bodies that there is significant room for improvement in this field. Research findings also show that: type of audit firm, the country of origin in which ultimate owner of an acquirer operates, legal form of an acquirer and finally transaction size play an important role in determining whether an acquirer will apply IFRS 3 when it comes to accounting for goodwill. Besides that paper reveals that materiality of goodwill is of significantly lower magnitude in domestic transactions than in transactions realized in developed European economies, but that the average percentage of consideration transferred allocated to goodwill is almost identical which implies that on average domestic and European M&As are equally motivated by the acquisition of goodwill as of the acquisition of identifiable net assets.

Impairment or amortization of goodwill? An analysis of CFO perceptions of goodwill accounting

Given the ongoing controversy around the accounting treatment of goodwill and the search by the International Accounting Standards Board (IASB) and Financial Accounting Standards Board (FASB) for improvements to goodwill accounting, this study surveys a global sample of 352 chief financial officers (CFOs) to understand their perceptions of adopting a goodwill impairment-only approach compared to an amortization model. More than half of the respondents agree that alternative accounting treatments of impairment testing might provide more useful information. However, almost two thirds still prefer goodwill impairment testing to the amortization process. Theoretically, the study shows that the impairment-only model preference is associated with characteristics on an individual, firm and country level. The results indicate that more expert CFOs and overall CFO perceptions of firms’ economic conditions and the role of external auditors affect preference for the goodwill accounting model. Further, there is evidence that dominant ownership structures and accounting culture affect CFO preferences. The study investigates several areas in which regulators and standard setters can intervene, thereby contributing to the debate on whether to reintroduce the amortization of goodwill.

Should the cost of capital, used in connection with goodwill impairment testing, vary across countries?

Learning outcomes Through the discussion of this case, students will have better understanding of the conceptual stakes related to accounting treatment for goodwill and factors determining goodwill impairment testing. The case also discusses the determination of the cost of capital and the impact of taking into account certain factors related to country risk for determining the discount rate in an international framework. Case overview/synopsis Greenfields Company continues to expand through acquisitions in emerging markets. The company aims to overcome the complexity of measuring goodwill subsequent to the initial recognition. The case was written to illustrate challenges of estimating the appropriate discount rate to be used in the goodwill impairment testing as investments in emerging countries give rise to many discount rate measurement problems such as the availability of statistical data and the risk assessment to be considered. Complexity academic level The case can be used at undergraduate or postgraduate level and it requires fundamental knowledge in accounting and corporate finance. Supplementary materials Teaching Notes are available for educators only. Subject code CSS 1: Accounting and Finance.

Goodwill’s Accounting Practices in Belgium and Compliance with IAS 36 Required Disclosures

This paper aims at studying the impact of the accounting treatment of goodwill on the mandatory disclosure required by the International Accounting Standard (IAS) 36 on the impairment test of goodwill. We use a sample comprising 79 companies listed on Brussels stock exchange to show that there is a great heterogeneity in current accounting treatment of goodwill. We identify two groups of companies: those that display the goodwill on a separate line in their balance sheet and those that integrate it in their intangible assets. For the later, the only way to notice the presence of goodwill is by looking at the financial statement’s notes presumably because those notes are expected to receive less scrutiny. Even if the compliance is not complete, the first group complies more with the paragraph 134 of IAS 36 than the other. Moreover, companies with a significant goodwill compared to both total assets and intangible assets are more compliant with IAS 36. The findings finally reveal that the notices issued by the Financial Service and Markets Authority (FSMA) have a limited impact on the disclosure level. There are some areas of improvement but others such as goodwill allocation to cash generating unit, determination of the recoverable amount, description of key hypothesis and the sensitivity test need more effort on compliance.

PERKEMBANGAN AKUNTANSI GOODWILL DARI DIVERSIFIKASI MENUJU KESERAGAMAN

This paper aims to review the prior research related to change in accounting treatment for goodwill from diversification to uniformity. Literature review is used to organize this paper. The paper discusses and compares the former accounting treatment used by countries around the world and the new IFRS treatment for goodwill. The paper highlights that the new standard has significantly changed the treatment for goodwill. According to IFRS 3, goodwill acquired through a business combination is no longer amortized but tested for impairment. Despite this standard has created a uniformed goodwill accounting; however, there are still lots of debates due to considerable ambiguity and subjectivity which inherent in impairment test. Findings suggest that future paper should examine how financial statement preparers and auditor are dealing with this new goodwill accounting treatment.

The Accounting Treatment of Goodwill, Idiosyncratic Risk, and Market Pricing

We study the relationship between goodwill and future returns by considering how the information content of goodwill before and after Statement of Financial Accounting Standards (SFAS) 142 affects idiosyncratic return volatility ( IVOL). Contrary to expectations, previous research has documented that stocks with high IVOL have low future returns ( IVOL anomaly). We build on research that shows that high IVOL is a function of low information on future earnings and define goodwill as a growth option that could be priced through IVOL. Our results show that, during the goodwill amortization period, IVOL is high and the IVOL anomaly is strong. In contrast, nonamortized and tested for impairment goodwill is informative and corrects the IVOL anomaly. We find evidence that SFAS 142’s recognition of goodwill as an asset with indefinite useful life results in value-relevant information about firm growth options and future earnings, thus reducing IVOL, eliminating the IVOL anomaly, and creating an environment of more efficient market pricing of risk.

The value-relevance of goodwill reported under IFRS 3 versus IAS 22

The application of International Financial Reporting Standard (IFRS) 3, which became compulsory for financial periods beginning on or after 31 March 2004, significantly changed the initial and subsequent measurement of goodwill in annual reports. This change in the accounting treatment of goodwill was not universally accepted and there has been ongoing debate around the efficacy of the new goodwill treatment. This study uses a revised Ohlson-type value-relevance model (Ohlson, 1995) to examine the association between the goodwill balance reported and the market value of a company before and after the introduction of IFRS 3. The findings show that the goodwill balance reported according to IFRS 3 provides information that is more value-relevant than the previous International Accounting Standard (IAS) 22 treatment. In the light of the ongoing debate around the accounting treatment of goodwill, this study provides regulators and researchers with valuable information to further assess the efficacy of the IFRS 3 goodwill treatment.

The Accounting Treatment of Goodwill as Stipulated by IFRS 3

The goodwill represents the future economic benefits arising from the assets that are not capable of being individually iden tified nor separately recognized and includes: the custom, the rights in the goodwill, the reputation of business product, the trademark and other intangible elements. Due to the different aspects of the elements that compose it, the assessment of the goodwill implies remarkable difficulties.The problem of recognising or not the goodwill in the asset of financial reports has generated the biggest controversies. The solutions presented in the international referential generated a reconciliation of the theoretical vision and of the accounting treatment of the goodwill offering more transparency to the operations of business combinations as regards the shareholders and social partners as well as the subsequent treatment of the expenses with this intangible asset on the financial results of the societies.The goodwill represents the future economic benefits arising from the assets that are not capable of being individually identified and separately recognized and includes: the custom, the rights in the goodwill, reputation of business product, the trademark and other intangible elements. Due to different aspects of the elements that compose it, the assessment of the goodwill implies remarkable difficulties.The problem that rises the most controversies is whether goodwill is really an asset in the full sense of the word. The specialists opinions are far of being considered convergent.

Accounting Discretion in Goodwill Impairments: UK Evidence

This study examines managers’ use of discretion in determining goodwill impairment losses following the mandatory adoption of IFRS 3 “Business Combinations,” and whether this discretion reflects opportunistic reporting by managers or the provision of their private information. Although IFRS 3 was issued to improve the accounting treatment for goodwill and provide users with more useful and value-relevant information regarding the underlying economic value of goodwill, it has been criticized on the grounds of the managerial discretion inherent in impairment testing. Therefore, ex-ante, it is unclear how the impairment-only approach has affected the reporting of goodwill impairment losses. After controlling for economic factors, empirical results reveal that managers are exercising discretion in the reporting of goodwill impairments following the adoption of IFRS 3. Specifically, goodwill impairments are more likely to be associated with recent CEO changes, income smoothing and “big bath” reporting behaviors. However, the results also indicate that goodwill impairments are strongly associated with effective governance mechanisms suggesting that managers are more likely to be exercising their accounting discretion to convey their private information about the underlying performance of the firm rather than acting opportunistically. These inferences are robust to various modeling specifications and variable definitions, suggesting that IFRS 3 has provided managers with a framework to reliably convey their private information about future cash flows consistent with the IASB's objectives in developing the impairment standard.

Goodwill in the Current Greek Accounting Environment

The growing interest in the issue of intangible assets not only in the scientific community but also in some professional bodies internationally can be explained by several points of view. From the business perspective, enterprises are increasingly motivated by external and internal forces to measure and proactively manage their intangibles. With respect to the issue of intangibles, goodwill has been debated in many countries throughout the world. Despite the numerous efforts and the existence of international accounting standards there is not yet a common accepted accounting treatment for goodwill. This study attempts on the one hand to impress the accounting treatment of goodwill internationally, on the other hand analyses the major subjects in relation to the accounting treatment of goodwill in Greece, since 2005, year where the international accounting standards have been in use for the Greek listed companies. The results indicate that the accounting treatment for the goodwill in Greece, despite the effort for accounting harmonization in Europe from 2005, sustains many differences especially for the no listed companies. Keywords—Intangible Assets, Goodwill, International Accounting Standards, Greek Accounting System and Law

The Relevance and the Dynamics of Goodwill Values Under IAS/IFRS: Empirical Evidences from the 2005-2009 Consolidated Financial Statements of the Major Companies Listed in Italy

The research aims at observing the actual effects on companies’ consolidated financial statements of the accounting treatment for goodwill as provided for by IAS/IFRS accounting standards. For this purpose, it focuses on the relevance of goodwill values in companies’ accounts (which is mainly investigated through a set of three ratios, comparing goodwill values with the total shareholders’ equity, with the total assets book value and with market capitalisation) and on the dynamics of stated goodwill values through time (observing the changes of the relevance ratios and separately analysing the effects on goodwill values of: impairment losses, mergers & acquisitions, adjustments to provisional values, dismissals, exchange differences, and other or not specified determinants).Empirical evidences from the 350 consolidated financial statements of the 70 largest Italian listed companies for the five years 2005-2009 showed that the IAS/IFRS accounting treatment for goodwill is determining an endemic process of progressive accumulation of goodwill values in companies’ consolidated financial statements, with the capitalisation of massive goodwill values when M&As are concluded, while impairment losses tend to be insignificant, even in the presence of adverse conditions of financial markets and real economy. Looking at its actual effects on companies’ accounts, the IAS/IFRS goodwill accounting treatment appears to be at least as equally unsatisfactory as the previous treatments it has replaced.

Does a goodwill impairment regime better reflect the underlying economic attributes of goodwill?

AbstractIFRS adoption transformed the accounting treatment for goodwill in many countries. Instead of amortizing goodwill, firms now test for its impairment and write off impairment losses against income. Accounting standard‐setting bodies claim that an impairment regime better reflects the underlying economic value of goodwill than systematic amortization. We investigate this claim by comparing the association between goodwill accounting charges against income and firms’ economic investment opportunities in amortization and impairment regimes. We find that the association between firms’ goodwill charges against income and the firms’ investment opportunities is stronger during the IFRS regime than the AGAAP regime. This indicates that, as claimed, impairment charges better reflect the underlying economic attributes of goodwill than do amortization charges.

The value relevance and reliability of reported goodwill and identifiable intangible assets

We examine the value relevance and reliability of reported goodwill and identifiable intangible assets under Australian GAAP from 1994 to 2003; a period characterised by relatively restrictive accounting treatment for goodwill and relatively flexible accounting treatment for identifiable intangible assets. Our findings, using an adaptation of Feltham and Ohlson (1995), suggest that for the average Australian company the information presented with respect to both goodwill and identifiable intangible assets is value relevant but not reliable. In particular, goodwill tends to be reported conservatively while identifiable intangible assets are reported aggressively.

Accounting Treatment of Goodwill in IFRS and US GAAP

Accounting Treatment of Goodwill in IFRS and US GAAP The article presents an overview of the new accounting treatment of goodwill regarding International Financial Reporting Standards and American Generally Accepted Accounting Principles. Goodwill acquired through a business combination is no longer amortized but tested for impairment. Despite the fact that the objective of the new International Financial Accounting Standard has been to move towards international convergence; significant differences between standards still exist. The article presents the main changes of the regulation in the last years and the key differences between the two accounting treatments. In spite of the new accounting approach there are still lots of discussions, which indicate that the field is still not properly regulated. Finally, the article offers possible directions for future research and reporting practice.

Towards an Understanding of the Phases of Goodwill Accounting in Four Western Capitalist Countries: From Stakeholder Model to Shareholder Model

The objective of this paper is to illustrate that the change in shareholders' attitude towards firms (from stakeholder model to shareholder model) influences the accounting treatments of goodwill. Our study is based on four countries (Great Britain, the United States, Germany, and France) and covers more than a century, starting in 1880. We explain that all these countries have gone through four identified phases of goodwill accounting, classified as (1) (immediate or rapid expensing), (2) weakened static (write-off against equity), (3) dynamic (recognition with amortization over a long period) and (4) (recognition without amortization but with impairment if necessary). We contribute several new features to the existing literature on goodwill: our study (1) is international and comparative, (2) spans more than a century, (3) uses the stakeholder/shareholder models to explain the evolution in goodwill treatment in the four countries studied. More precisely, it relates a balance sheet theory, which distinguishes four phases in accounting treatment for goodwill, to the shift from a stakeholder model to a shareholder model, which leads to the preference for short-term rather than long-term profit, (4) contributes to the debate on whether accounting rules simply reflect or arguably help to produce the general trend towards the shareholder model, (5) demonstrates a one-way evolution of goodwill treatment in the four countries studied, towards the actuarial phase.

Towards an understanding of the phases of goodwill accounting in four Western capitalist countries: From stakeholder model to shareholder model

The objective of this paper is to illustrate that the change in shareholders’ attitude towards firms (from stakeholder model to shareholder model) influences the accounting treatments of goodwill. Our study is based on four countries (Great Britain, the United States, Germany, and France) and covers more than a century, starting in 1880. We explain that all these countries have gone through four identified phases of goodwill accounting, classified as (1) “static” (immediate or rapid expensing), (2) “weakened static” (write-off against equity), (3) “dynamic” (recognition with amortization over a long period) and (4) “actuarial” (recognition without amortization but with impairment if necessary). We contribute several new features to the existing literature on goodwill: our study (1) is international and comparative, (2) spans more than a century, (3) uses the stakeholder/shareholder models to explain the evolution in goodwill treatment in the four countries studied. More precisely, it relates a balance sheet theory, which distinguishes four phases in accounting treatment for goodwill, to the shift from a stakeholder model to a shareholder model, which leads to the preference for short-term rather than long-term profit, (4) contributes to the debate on whether accounting rules simply reflect or arguably help to produce the general trend towards the shareholder model, (5) demonstrates a “one-way” evolution of goodwill treatment in the four countries studied, towards the actuarial phase.

Trade‐related valuations and the treatment of goodwill

Guidance Note 1 of the Red Book states that the valuation of an operational entity includes four components: the land and buildings; the trade fixtures and fittings; the trading potential, excluding personal goodwill; and the benefit of any transferable licenses and consents. Accounting changes in recent years have increasingly recognised the importance of intangible assets such as intellectual capital and goodwill. Similarly, recent tax changes demonstrate the government's acceptance of the importance of such items in achieving and maintaining business competitiveness. This paper has two key objectives: first, to analyse the application of the Red Book to trade‐related valuations, paying particular attention to the treatment of goodwill and second, to critically evaluate the accounting treatment of goodwill and in particular the application of Financial Reporting Standard 10. In order to understand the workings of the market, the corporate hotel sector was used as a case study. The key findings of the research are that valuers expressed considerable unease with the apportioning of market value between tangible assets and goodwill, there was no consensus on how (or if) goodwill could be measured reliably. Second, that the valuation methods adopted are, to a degree, naïve. While explicit changes are made to the cash‐flow projections, there is insufficient appreciation of the changing risk profile that might lead to an adjustment to the earnings multiplier. The accounting difficulties and inconsistencies concerning goodwill arise largely because of inadequate valuation methods. Recent tax changes also point to the need for a robust and defendable valuation methodology. Application of one such theoretically sound approach to valuing goodwill (the bridge model) is illustrated in this paper. While the research focused on the corporate hotel sector, the findings have wider implications for other sectors of the market where operational entities are valued with regard to their trading potential.

Accounting treatment of goodwill: yesterday, today and tomorrow

The issue of goodwill has been debated in many countries throughout the world. Despite numerous efforts and the existence of accounting standards and exposure drafts issued by various professional bodies internationally, there is yet to be a universally accepted accounting treatment for goodwill. The opinion on this subject differs and changes frequently. The dichotomy of having to preserve prescribed recognition criteria on the one hand and the need to report useful information on the other has led to the many controversial issues debated on the subject of goodwill. This study centres around the international accounting treatment of goodwill in the past, present and future. This study reviewed some of the issues that surrounded the accounting for goodwill where it was found that goodwill accounting had faced many problems. Besides problems, this project also looks into the prospect of the accounting for goodwill in the cyberspace era and emergence of the knowledge‐based economy. This study confirms that controversy remains internationally with no solution in sight in the foreseeable future internationally.

Arguing About Goodwill

This paper reviews the debate on the accounting treatment of goodwill between the publication of the Accounting Standards Committee’s Discussion Paper of 1980 and the issue by the Accounting Standards Board in 1997 of FRS 10. It considers the responses to six discussion/working papers and exposure drafts, analysing the pattern of respondents and reviewing the consistency of the representations submitted, the arguments employed and their development at each stage of the debate. Submissions were found to vary greatly in quality, ranging from well-argued, coherent documents maintaining a consistent outlook over time to poorly-argued responses and submissions involving unexplained inconsistencies with the respondent’s previous stance. Considerable overlap was found with arguments used in the explanatory notes of accounting standards; almost all of the types of argument used by the ASC to justify any accounting standard showed up on one side or the other of the goodwill debate. The resulting standard is better understood in the context of the very wide range of arguments brought to bear on this complex debate.

Motives underlying the method of payment by UK acquirers: the influence of goodwill

The treatment of goodwill in the UK has been the subject of a recent contentious Financial Reporting Standard, FRS 10. It is shown that goodwill write-off considerations appear to have an influence on the form of payment used in the acquisition, and that this influence is associated with the relative portion of the acquirer's net worth which is available for write-offs and the ratio of goodwill to target asset value. These findings are robust to controlling for factors shown to have influenced the choice of acquisition financing by Martin (1996), and to additional controls for any over-valuation of equity. The result that the accounting treatment of goodwill is associated with the financing decision in an acquisition is one that may have important policy implications for UK accounting.