Goodwill Valuation Research Articles

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.

Goodwill Valuation Enhancement through Capitalization Method and Statistical Impact Analysis

The valuation of Goodwill (GW) has remained one of the several critical issues in financial analysis. This aspect is particularly important for mergers and acquisitions due to the significance of intangible assets. This study delves into the capitalization method of super profit (CMSP), a prominent technique for GW valuation, enhanced by the integration of statistical tools. Assessing a company’s excess profits over its average return on tangible assets is part of the CMSP. Finding the variables that have a significant impact on GW valuation, such as average profit, capital employed, and rate of return, is the main goal of this research. These issues are thoroughly investigated through statistical analysis to give stakeholders useful information for well-informed decision-making. Additionally, the study seeks to identify the external elements influencing this process as well as the internal aspects influencing GW valuation. Regression analysis, correlation matrices, response analysis and ANOVA are used to improve GW assessment and comprehension of the complex relationships between different factors.

Valuation of Goodwill for an Engineering Firm

The concept of valuing personal and enterprise goodwill is a study in the art of quantifying subjective values. Sellers strive to maximize goodwill, while buyers strive to minimize goodwill. No persons are denying the existence of goodwill; rather, the debate is centered around the value of that goodwill. This paper seeks to define a holistic approach to fairly quantifying the value of goodwill for an engineering firm. The Graph Model for Conflict Resolution (GMCR), a decision tool grounded in game theory, is used to illustrate the inherent conflict around setting an accurate goodwill value and the inherent negotiation between buyers and sellers.

Goodwill measurement in consolidated financial statements

The largest business in terms of capitali­zation value, revenues and profits was formed as a result of a business combination. Consolidated financial statements are of undoubted value to users and stakeholders in assessing risks, prospects and analyzing the interaction of companies within the group. Special indicators of consolidated financial statements, such as goodwill, allow estimating the expected value of acquired companies in a business combination. However, the current methodology does not allow for the evaluation of all aspects of value that constitute goodwill. The aim of the article is to supplement the methods of goodwill valuation in business combinations for further substan­tiated disclosure in consolidated finan­cial statements, in accordance with the interests and needs of investors and managers. The research methodology is based on a systematic approach, critical analysis, synthesis, induction and deduc­tion, comparison, economic-mathematical methods of goodwill calculation, and genera­lization of principles of consolidated reporting. An analysis of key international standards allowed us to determine the peculiarities of applying the acquisition method for different types of business combinations. The share of ownership in an investee determines the nature of influence and the method of consolidation. Goodwill is the difference between the purchase price and the fair value of the net assets acquired in a business combination. When companies merge, goodwill reflects the intangible aspects of the business and the expected added value, which serves as the investment object. Therefore, methods for valuing goodwill during business combinations are identified to disclose in consolidated finan­cial statements in accordance with IFRS. Additionally, a group of complementary good­will valuation methods is systematized to determine and justify all aspects of forming the undisclosed added value of the investee compa­ny. The proposed methodology allows for considering the interests of various stakeholders in goodwill valuation. It is crucial to regard the goodwill disclosed in the financial statements as consent and willingness of the parent company to pay more, based on evidence and calculations obtained through a comprehensive goodwill valuation methodology. The proven hypothesis of the research suggests that for a justified valuation of goodwill during consolidation, it is necessary to supplement existing approaches and measure the value of brand, long-term stability, sustainable development, corporate so­ci­al responsibility, and utilize artificial intelli­gence. Goodwill reflects strategic value but may also be subject to impairment if its value is not sufficiently supported by expected profits.

Multiple large shareholders and M&A quality: evidence from China

ABSTRACT This study investigates the influence of the presence of multiple large shareholders (MLS) on the quality of mergers and acquisitions (M&A). Using data from the Chinese market, we find that the presence of MLS in acquiring firms is associated with a higher level of goodwill impairment in the three-year period following the completion of an M&A transaction, relative to firms devoid of such shareholder structures. The further analysis suggests that the identity of these shareholders is crucial; specifically, when the second-largest shareholder is identical to the controlling shareholder, the adverse effects on goodwill valuation are more significant. This relationship is mitigated when the identities of the controlling and the second-largest shareholders differ. The impact is particularly noticeable in transactions involving commitment performance contracts, related party transactions, and in sectors characterized by high goodwill valuations. This study contributes to the literature on the economic outcomes associated with MLS structures in China, a context marked by the prevalence of such ownership arrangements and limited minority shareholder protections.

Corporate Tax Planning: The Refashioning of Earnouts

This article discusses the Canadian income tax treatment of earnouts, primarily as they relate to share-based sale transactions. The article begins by providing an overview of the commercial environment driving the earnout structure in recent transactions and the resulting tax impact. It then examines the legislative history and income tax treatment of earnouts, including the cost recovery method and the most recent view of the Canada Revenue Agency, followed by a comparison of royalties with earnouts. Next, the definition and valuation of goodwill are explored in relation to the impact of goodwill on the characterization of earnouts. The article then provides an overview of a reverse earnout as an alternative to a standard earnout structure, its tax implications, and the most recent court case on a reverse earnout. Finally, the article discusses the nuances of the tax treatment of earnout payments to purchasers after the acquired property to which the earnout relates has disappeared or has been disposed of.

Modern problems of goodwill valuation in accounting and reporting and ways to solve them

Goodwill valuation issues are among the most problematic for modern accounting and reporting. This article identifies the most pressing problems in this area today and presents proposals for their solution. During the research, such methods as the method of analogies, logical approach, analysis and synthesis, comparison, grouping method, systematic approach were used. As a result of the research, proposals were made regarding the terminology used in the above area, as well as the author’s view on the rules for the initial and subsequent evaluation of goodwill, both acquired in a business combination and created within the organization. The results obtained in this article will be useful to a wide range of readers interested in modern problems of accounting and reporting, including the valuation of assets at their recognition and after their recognition in accounting. The results obtained in this work can also be applied in the educational process of higher educational institutions, in the practical work of accounting departments and in the development and improvement of relevant regulatory documents on accounting.

The enterprise goodwill valuation – ranking of Polish brands

Purpose: Article discusses the valuation of company brands, focusing on Polish enterprises. It delves into the increasing importance of intangible assets like brand value in the modern economy. Design/methodology/approach: The paper presents a detailed methodology for valuing brands, which includes analyzing financial reports, surveys, and stock exchange data. The study highlights the complexity of brand valuation, considering factors like intellectual capital, goodwill, and market volatility. Findings: It emphasizes the need for a multifaceted approach in valuation, integrating various methods to achieve a more accurate assessment. Additionally, it presents a list of the most valuable brands in 2021, demonstrating the dominance of certain sectors like technology and retail in brand value. The research concludes that there is no single, definitive method for brand valuation, underscoring the subjective nature of this process. Originality/value: This paper is base on Polish enterprises, which provides appropriate data. The presented methodology is a original approach. Keywords: Brand Valuation, Intangible Assets, Financial Analysis, Goodwill Evaluation. Category of the paper: Research paper.

Valuation of goodwill using weighted average return on assets: assessment of average transport and storage enterprise in the Czech Republic

Valuation of goodwill using weighted average return on assets: assessment of average transport and storage enterprise in the Czech Republic

Market Responses to Private and Public Targets: The Role of Goodwill Valuation*

AbstractInvestors overprice goodwill value acquired from a private target during a merger and acquisition (M&A) announcement. However, the overpricing of goodwill is corrected in the years following the deal's completion. Our results show that investors predict the decreasing value of goodwill and promptly adjust their pricing regardless of goodwill impairment. The differential market reactions to goodwill between private and public targets are economically significant. The pricing on goodwill obtained from a private target is 47% higher around the announcements and 44% (33%) lower one (two) year(s) after the M&A completion than that from the public target.

The Impact of Acquiring Firm’s Growth Opportunity on the Valuation of Goodwill

Purpose This paper analyzes the differential value relevance of goodwill depending on the acquiring firms’ growth opportunity. Today, M&A has become an important tool for firms’ achieving growth. While prior literatures report a strong relation between acquisitions and growth opportunity, acquiring firms’ growth opportunity may affect the valuation of purchased goodwill reported as a result of M&A. Design/Methodology/Approach The samples are firms reporting goodwill from 2011 to 2020. This paper uses Ohlson’s valuation model to analyze the differential value relevance of goodwill based on firms’ growth opportunity. Findings This paper finds a positive relation between firms’ growth opportunity(measured by IOS, Tobin Q or Asset Growth) and value relevance of goodwill. The result remains constant when the test is applied only to the firms reporting goodwill over the median. The result implies that market attaches higher values to goodwill reported from M&A for which the acquiring firms have higher growth opportunity. Research Implications This paper is the first to analyze the relation between firms’ growth opportunity and value relevance of goodwill. The result implies that firms’ growth opportunity plays an important role in valuing M&A and goodwill.

Визнання внутрішньо генерованого гудвілу як ідентифікатора оцінки нематеріальних активів у системі управлінського обліку підприємства

The aim of the article is to analyze the existing methods of goodwill valuation and determine the possibility of their application in relation to the identification and recognition of internally generated goodwill as an accounting object and an information basis for effective management of the assets of enterprise. As a result of the analysis of regulatory documents and scientific works of scholars on the exitant valuation methods, the main approaches to the conception of value characteristics were considered, the advantages and disadvantages of their application were allocated, and recommendations for the assessment of internally generated goodwill were provided. As a result of the study, global trends in the accumulation of internally generated goodwill were analyzed, its economic essence and role as an identifier of intangible assets in the management accounting system were considered. The main elements of internally generated goodwill are allocated in accordance with the sources of its formation, which will become the basis for the development of a methodology for its assessment. The accounting and expert directions of assessment of internally generated goodwill are considered, in terms of which the essence, advantages and disadvantages of methods are analyzed, and the possibility of their application to the elements of goodwill is highlighted. It is noted that none of the methods is universal and cannot fully ensure the efficiency of the management of internal goodwill. It is proposed to conduct a comprehensive assessment of internally generated goodwill using various methodologies. As the main ones, methods of additional profit and of profit advantages are proposed, for which the calculation procedure is provided. It is recommended to combine calculation methods with empirical ones based on expert conclusions to increase the objectivity of the input data and the results obtained. Prospects for further research are to develop a detailed system of elements of internal goodwill based on the proposed general approach, methods of their identification and evaluation, and the formation of a system of estimated indicators of such intangible resources.

A study of value-relevance and reliability of intangible assets: What do we know from the restaurant industry?

Despite the importance of intangible assets in firm valuation, the value-relevance and reliability of intangibles remain unclear. Specifically, intangible assets are critically important to restaurant firms because of the intangible nature of their core services. Thus, this study examined the value-relevance and reliability of intangible assets in the restaurant industry. The results of this study confirmed that goodwill and identifiable intangible assets had significant value-relevance and reliability in association with firm value creation. The results also suggested that intangible assets are significantly related to restaurant firm value, implying that restaurant investors can rely on the intangible information on balance sheets when considering future investments. However, this study found that franchising has a positive moderating effect on the relationship between goodwill and market-based/accounting-based firm value measures, but it does not moderate the relationship between identifiable intangibles and restaurant firm value. This means that the value created by franchising is not fully reflected in the valuation of goodwill, while identifiable intangibles are fairly well valued or at least are not closely related to the value created by franchising. Consequently, the value relevance and reliability of non-franchise restaurants were confirmed. In contrast, although the value reliability of franchise restaurants was confirmed, the value relevance of franchise restaurants was not fully supported.

Issues Relating to Goodwill Valuation

According to both theoretical and empirical research results, this paper has the aim to determine, the extent to which the current accounting regulatory framework (IFRS 3 and IAS 36) offers an adequate basis for correct valuation of goodwill. We have researched all the available critical reviews of the accounting treatment of goodwill and the quality of applying accounting regulations onto expression of the goodwill position in BH companies’ practices. The empirical research was conducted on all the companies in the Federation of Bosnia and Herzegovina (FBiH), which recorded goodwill in their balance sheets in the period from 2013 to 2018. The research results have shown a high level of subjectivity in the process of determining the value of goodwill, and great discrepancies in adhering to the accounting regulations in the part of additional valuation and expression of goodwill value in financial reports. This resulted in the fact that the share of companies in FBiH which express decreased values of goodwill is far greater than the share of companies in the European union (EU). The main contribution of this paper is the fact that this is the first comprehensive research on evaluation of goodwill in FBiH companies in comparison to the situation in the EU. Also, it confirms the Agency Theory and shows great subjectivity in evaluation which results in an unjustified expression of a higher operative success in financial reports.

Goodwill valuation approaches in domestic and foreign practice

Goodwill valuation approaches in domestic and foreign practice

Diffusion of fair value measurement (IFRS 13): Perception of Auditors

This study investigates the diffusion of fair value measurement (IFRS 13), with a focus on extent of application, and valuation methods used by reporting entities in Nigeria. Data-collection was through a structured questionnaire administered on 400 auditors from diverse backgrounds in terms of audit firm size, international affiliation, and global presence. Analysis of data obtained from 277 respondents, using descriptive statistics and one-way ANOVA, reveals that the overall extent of application of fair value measurement is moderate. However, there is significant difference in application level among reporting entities in the valuation of financial assets, financial liabilities, investment property, and goodwill & intangibles acquired in business combination, but no significant difference in the valuation of pension liabilities, endowment funds, share-based payments, property, plants & equipment, and land & building. It appears the level of investment in an asset/liability determines the application rate of fair value measurement—while high level of investment in an asset/ liability prompts extensive application, low level of investment correspondingly results into negligible usage. Further, the overall application rate of the valuation methods is in the descending order of: market, expert estimation, cost and income approaches respectively. The market and cost approaches are applied more extensively in the valuation of tangible assets; the market approach is preferred in the valuation of financial instruments, while expert estimation is more applicable in the valuation of intangible assets and liabilities. Given that the market approach is the predominant valuation method, the study calls on relevant authorities and concerned stakeholders to emplace institutional apparatus that will facilitate the ready availability of fair value prices for accounting items.

Analysis of Internally Generated Goodwill Indicators: A Case Study of the Slovak Republic

Abstract Background and purpose: Knowing key indicators of goodwill value can contribute to its effective management and growth of the market value of the enterprise. The purpose of this research is to identify individual goodwill indicators. The paper aim is to obtain potential indicators of enterprise goodwill under the conditions of the Slovak Republic. Design/Methodology/Approach: Paper data included 11,483 financial statements of Slovak enterprises in 2017. The value of residual enterprise income represents the value of goodwill. Input data for the identification of goodwill indicators represented 15 financial-economic variables. Outliers in data were searched and removed through an interquartile range. Multicollinearity among input variables, by the coefficient of determination and variance inflation factor, was also analysed. A statistically significant correlation between goodwill and its potential indicator were tested by the significance test of the Pearson correlation coefficient and correlation matrixes. Results: Research results reveal the existence of a statistically significant correlation between goodwill and 8 input variables, which represent its potential vital indicators. Conclusion: Paper findings bring new possibilities for goodwill management, which may create an essential competitive advantage of a company. For the scientific community, the findings represent sources of potential goodwill indicators which can be used for the creation of the new model of goodwill valuation in future research.

Possibility of Company Goodwill Valuation: Verification in Slovak and Czech Republic

Abstract The paper deals with the possibilities of company goodwill valuation and verification. The value of company goodwill is still an actual issue for the scientific community. Goodwill as an economic phenomenon has attracted the attention of economic experts since the nineteenth century. Nowadays, there are many approaches to goodwill valuation. However, its identification and quantification are still a challenge. The paper aim is to identify significant sources of company goodwill creation and their verification on the sample of 2 European countries with the similar business environment, political stability and regulatory platform - Slovak and Czech companies. The sample for the identification of significant sources of company goodwill creation consists of the financial statements of Slovak companies in 2015. The sample for data verification consists of the financial statements of Slovak and Czech companies in 2016. The paper identifies the determinants of goodwill creation by multiple regression analysis. The paper also verifies the total explanatory power of these determinants by matrixes of changes. Volatility and deviation of the results are captured by descriptive statistical methods. The paper’s results point to a necessity to identify the key determinants of goodwill creation. They bring the construction of an econometric model for company goodwill valuation. It could be used to compute the value of company goodwill of the individual companies in the Slovak economic conditions.

Step Zero: Determinants and Implications of Reliance on the Qualitative Goodwill Impairment Assessment

I examine the use of qualitative versus quantitative impairment testing methods and their differential implications for future impairments and goodwill valuation. Using hand-collected data, I find that the likelihood of reliance on a qualitative assessment is decreasing in both the complexity of goodwill and the risk of an underlying goodwill impairment. I also find that the likelihood of large future goodwill impairments is lower on average for firm-years in which the firm relies on a qualitative assessment. Finally, I investigate investor perceptions of this choice and find evidence that investors place a premium on goodwill when firms rely on a qualitative assessment versus a quantitative test. This finding suggests that investors perceive a firm’s goodwill impairment testing method choice as reflective of management’s private information. Overall, results suggest that managers are not using the discretion in ASU 2011-08 opportunistically, which was a concern in implementing this new standard.

Contemporary Issues Surrounding an Impairment-Only Approach to Acquired Goodwill: A Selected Review

This paper presents a selected review of contemporary issues surrounding an impairment-only approach to accounting for acquired goodwill and addresses the question of whether an impairment-only approach has resulted in an improvement in an accounting for goodwill. The review is structured around three main themes: concerned raised by stakeholders regarding an impairment-only approach, causes of the debates on goodwill impairment, and proposed solutions offered by stakeholders. The contribution of this paper to the debate on an impairment-only approach to acquired goodwill is to demonstrate that even though an impairment-only approach has posed implementation, auditing and enforcement challenges, it has also encouraged standard-setters, regulators and firms worldwide to make concerted efforts in bringing in more clarity to the valuation of goodwill and its impairment test. The review ends by offering practical ways forward on an accounting for acquired goodwill.