Goodwill Valuation Research Articles

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

Mergers and acquisitions (M&As) are an important aspect of corporate finance. To better understand the factors affecting market reactions to M&As, we examine market responses to M&As with private and public targets both at the time of announcement and after completion. Using a sample of over 1,500 M&As completed from 2002 to 2016, we find that investors tend to overprice the value of intangible assets acquired from a private target at the time of an M&A announcement but that the overpricing of goodwill is subsequently corrected in the years following the deal’s completion. We show that investors predict the decreasing value of goodwill and can promptly and efficiently adjust its pricing regardless of whether the impairments have been delayed, indicating that investors believe that acquired goodwill deteriorates regardless of goodwill impairment. We also provide evidence that Statement of Financial Accounting Standards (SFAS) 141(R) increases investors’ long-term valuations of other acquired intangible assets but negatively impacts goodwill’s market valuation after an acquisition. Our findings may be useful to the accounting standards setters in improving reporting guidelines related to goodwill and other intangible assets.

Intangible Assets and Goodwill Valuation in the European Union

European valuation standards TEGoVA have conception for valuation of intangible assets and they formed to conform to International valuation standards (IVS) also to reach worldwide consensus in best practices in valuation process. The process of valuation of intangible influences was also surveyed in China, Hong Kong, USA, Canada, Japan, Germany, UK, Poland, Russia and overall in the Europe. Situation in mentioned locations is similar, valuation of intangible influences has not been determined by a concrete list of items and there has not been established concrete clear process. The subject matter of this paper is a proposal for a method of valuation of intangible effects that will impact assets prices. It deals with proposed procedures for valuation of intangible assets. Special effects are in particular name, historical value, design, quality of layout, security aspects, accessibility, and conflict groups of inhabitants in or near the property, location, provenience and other.

Auditing Goodwill in the Post‐Amortization Era: Challenges for Auditors

ABSTRACTThe elimination of goodwill amortization in 2001 brought about significant change in how companies are required to account for goodwill. This change in accounting also brought with it new challenges for auditors, namely evaluating the reasonableness of management's assumptions related to goodwill valuation. In addition to introducing technical challenges, this task is particularly difficult given the misalignment in incentives it creates between managers who likely prefer to avoid recording an impairment and auditors who seek to minimize the bias in management's impairment testing. This study focuses on the consequences of the misaligned incentives that auditors face under the current goodwill assessment process. We find that the decision to record a goodwill impairment is associated with an increase in the probability of auditor dismissal. Consistent with the presence of significant friction with clients, our results also indicate that the likelihood of auditor dismissals is negatively related to the favorability of the impairment decision. Furthermore, we find that companies impairing goodwill prior to dismissing auditors subsequently employ auditors that are, on average, more favorable to clients in their impairment decisions.

Рекомендации по внедрению модели управления деловой репутацией (гудвиллом) на промышленных предприятиях

The problem of effective management of the intangible assets is quite serious in the circumstances when the rapid information flow about the functioning of any company (industrial enterprise) may alter its market value quite fast. Chief among the intangible assets is business entity’s reputation that is manifested as goodwill in various cases on the entity’s balance sheet. The system of managing business reputation created by the author must be transpired into the mission, tasks and KPIs of the management team in order to both improve the reputation and increase the market value of the entity. Materials & Methods: the holistic model of the quantitative management of the enterprise’s reputation (goodwill) developed by the author includes: 1) managing of the reputation by influencing the structure of value added (profit, amortization and salary); 2) managing of the enterprise’s business reputation via influencing the structure of capital (whereas π1 — is the ratio of current assets to total assets and π2 — the indicator of the enterprise’s cover with the own and long term credits and 3) managing of goodwill based on the rating valuation utilizing the financial coefficients. This model of the quantitative valuation of goodwill carries scientific value and is the product of author’s long term research. In the work the author also presents the organizational chart of carrying out calculations to manage business reputation of the enterprise with the detailed description of five steps for management in the public company (from collection and preparation of data about market value of the company and its goodwill to confirmation of the action plan with the participants of the process and enterprise’s top officials to manage goodwill in the long-term). Results: the author describes in detail management actions targeted at enhancing the business reputation depending on the value added characteristics and on the capital structure, namely decreasing or increasing of salaries; increasing or decreasing the value of amortization; increasing or decreasing the size of current assets or short term debt). The author also highlights potential conflicts among various departments of the enterprise while managing the business reputation and outlines potential solutions to these conflicts through the creation of the formalized internal system of mitigation and reaching the agreement. Discussion & Conclusions: the result of the conducted research is the adaptation of a unique model of its quantitative valuation of business reputation with its subsequent management to enhance market value of the whole company via increase in value added and improvement of the capital sctructure.

Has goodwill accounting gone bad?

Prior to SFAS 142, goodwill was subject to periodic amortization and a recoverability-based impairment test. SFAS 142 eliminates periodic amortization and imposes a fair-value-based impairment test. We examine the impact of this standard on the accounting for and valuation of goodwill. Our results indicate that the new standard has resulted in relatively inflated goodwill balances and untimely impairments. We also find that investors do not appear to fully anticipate the untimely nature of post-SFAS 142 goodwill impairments. Overall, our results suggest that, in practice, some managers have exploited the discretion afforded by SFAS 142 to delay goodwill impairments, thus temporarily inflating earnings and stock prices.

Goodwill and value creation: insights from Italian pioneers

This paper aims to determine the contribution of Italian pioneers of 'Economia Aziendale' to the debate on goodwill. The relations between Italian pioneers' thoughts and modern concepts and practices in goodwill valuation, are analysed by an in-depth literature review of studies published between 1840 and 1940. We develop a comparative analysis of past theoretical approaches in order to, on one hand, investigate the relations with the current studies and practices and, on the other hand, build new insights for future studies. Our findings show that the studies of the Italian pioneers intertwine with international research. Italian pioneers contributed to the development of the knowledge on goodwill with farsighted thoughts about the relations among accounting, value creation and strategic valuations. Moreover, we found additional hidden suggestions on goodwill 'duration' and accounting, which should have relevant implications for future developments in studies, accounting standards and the professional valuations of acquisition value of this asset.

Research on Intagible Assets and Goodwill Valuation

The process of valuation of intangible influences was surveyed in China, Hong Kong, USA, Canada, Japan, Germany, UK, Poland, Russia and Western Europe. Situation in mentioned locations is similar, valuation of intangible influences has not been determined by a concrete list of items and there has not been established concrete clear process. The subject matter of this thesis was a proposal for a method of valuation of goodwill - special effects that will impact assets prices. It deals with proposed procedures for valuation of intangible assets, and definitions of such property. Special effects are in particular name, historical value design, quality of layout, security aspects, accessibility, conflict groups of inhabitants in or near the property, location, provenience and other. The value of goodwill can be calculated as the difference between the market value and the material value. Part of the methodology is a general proposal for a method how to divide the assets into tangible and intangible part and author’s software VALUE-RATUS 2015.

Accounting Discretion and Purchase Price Allocation After Acquisitions

The recent movement in standards setting toward fair-value-based accounting beyond financial assets and liabilities calls for more empirical evidence on fair-value measurement, especially that of intangible assets. This article studies the initial valuation of goodwill and identifiable intangible assets after acquisitions. We find that the allocation of purchase price to goodwill and identifiable intangible assets is related to the economic determinants of the valuation. However, it is also significantly affected by managerial incentives arising from the differential treatments of goodwill and identifiable intangible assets under Statement of Financial Accounting Standards (SFAS) 142. The same managerial discretions are not exhibited in the purchase price allocation prior to SFAS 142, when goodwill and other intangibles are both amortized. These findings suggest that unverifiable fair value measures are associated with the underlying economics but also deviate from the true values in the presence of management reporting incentives. Further analysis suggests that external appraisers constrain managerial discretion in intangible asset valuation to an extent but do not completely eliminate it.

Effect of goodwill on the performance of the organization of the construction sector

There are issues of Goodwill and reputation risk. Particular attention is paid to the development of national standards for the evaluation of the experience and reputation of organizations. It is de- scribed the justification of creating the standard for evaluation of the experience and reputation of the building organizations. There is the method of valuation of goodwill, intangible assets that evaluates construction company. The methodology includes five factors, each of which includes some subfactors. The assessment according to this method of Russian standard 56002-2014 .Evaluation of experience and reputation building organizations. the construction company will be assigned a code of business reputation.

The influence of family and government-controlled firms on goodwill impairment

Purpose – The purpose of this paper is to examine the effect of ownership structure on the goodwill impairment policy of Malaysian listed firms. In particular, the authors test whether the direction and magnitude of goodwill impairment are related to whether firms are government or family controlled firms. Given the highly concentrated ownership of firms in Malaysia, the authors suggest that the “entrenchment effect” will take precedence over the “alignment effect”, which will be reflected in the accounting policy on goodwill valuation and impairment. Design/methodology/approach – This study utilizes logistic and Tobit regressions to test the prediction, controlling for a range of factors that might affect the goodwill impairment decision. The data were manually collected through 579 firm-year observations from the financial reports of companies listed on the Bursa Malaysia web site for the period 2003-2009. Findings – The authors find that family controlled firms are more likely to record goodwill impairment than non-family controlled firms. The results are, however, not significant in government-controlled firms. Similar evidence in prior studies finds that Malaysian firms are more likely to recognize and record higher goodwill impairment loss in their first year of adoption than in the subsequent years. Interestingly, in contrast to prior studies, longer chief executive officer (CEO) tenure is found to be positively associated with the likelihood to recognize and record higher impairment of goodwill. Originality/value – This paper is one of few studies that examine the role of ownership structure on goodwill accounting policy choice where ownership structure is highly concentrated and government owned firms play a significant role in the economy. The paper also examines goodwill policy choice before, during the transition and subsequent to the adoption of the goodwill standard in Malaysia, which has not been addressed before.

Communicating Uncertainty in Financial Statement Narratives: Goodwill Impairment Testing

The goal of this paper is to determine how disclosures of goodwill impairment tests under IAS 36 are prepared in conditions of high uncertainty. The data come from Polish companies listed at the Warsaw Stock Exchange, where economic and legal developments have been dynamic as compared to the main global equity markets. We use qualitative methods, interviews and content analysis, and we draw on genre theory to understand how the narratives in disclosures are created. We find that the disclosures follow clear rules of a genre, which prohibit the discussion of uncertainty. In cases where significant doubts concerning the reliability of goodwill valuation exist, preparers place clues that professional readers can notice and follow to determine the degree of uncertainty. Preparers may only be encouraged to provide this information directly if specific disclosure requirements are introduced.

Valuating Goodwill of Cultural Enterprises Using Wavelet Neural Network

Goodwill is one of the most valuable intangible assets of companies. Typically, only when some financial behaviors occur, for example, the proper rights of assets to be transferred or invested as shares, it is time to evaluate the value of goodwill. However, we assume that it is necessary to periodically evaluate the goodwill during the normal business period for the sake of maintaining and improving the commercial goodwill of enterprises. To this end, we focus on the problem of valuating the goodwill. Typically, the process of evaluating the goodwill involves two steps. First, a set of factors associated with the goodwill valuation should be abstracted. Second, above factors should be integrated with a proper method. To more precisely value the goodwill, in this paper we propose to employ a Wavelet Neural Network (WNN) based method to train a model based on a series of indicators. Our experiments prove the feasibility and efficiency of our method.

A Modified Wavelet Neutral Network Model for Measuring Goodwill

Recently years have witnessed the development of cultural enterprises. As one of the most valuable intangible assets, goodwill valuation for cultural enterprises has gained a lot of attention. An efficient method is to use Wavelet Neural Network (WNN) model for learning the predicted value of goodwill given a set of indicators. However, there are some issues of the basic WNN model. On one hand, the randomly determination of the initial state of the neural network leads to the possibility of converging to a local optimal point. To solve this problem, we propose to employ Genetic Algorithm (GA) for optimizing the initial parameters before model training. On the other hand, the training cost of basic WNN is typically big and its convergence speed is relatively slow. To accelerate the convergence speed, we introduce Levenberg-Marquardt (LM) algorithm for training. Besides, we conduct experiment to evaluate the performance of our proposed GA-LM-WNN algorithm.

The Impact of Business Intelligence Recognition on Goodwill Valuation

The purpose of this paper is to determine the value of business intelligence software in the adjusted net assets value used in the process of evaluating a company's goodwill. The paper starts with a literature based approach for asserting the added value brought by business intelligence software in a company which will be used as a support for proposing a new method of determining the adjusted net assets value. These new market value oriented approaches are benchmarked for a diverse sample consisting of both BVB and NYSE listed companies. The estimated result of this research is the determination of an adjusted net assets valuation method that will take into account the value of business intelligence software a company uses and correct its goodwill. The research presents an extensive literature review and adopts a positivist paradigm in evaluating the theoretically constructed method. It also consists of a critical approach of case studies presented by literature. The importance of this research is to provide the investors with a better way of valuating adjusted net assets and, as a consequence, a company's goodwill, which can lead to better investing, practices in the future. Also, this research can provide a new and improved tool for anyone who wishes to adapt their valuation instruments to the changes resulted from technological progress.

Tratamiento contable de las transacciones separadas en las combinaciones de negocios Proceso armonizador de la normativa contable internacional (IFRS) y americana (FAS)

Amendments made to 2007 Financial Accounting Standards ¾FAS 141 (R)¾ and 2008 International Financial Reporting Standards ¾IFRS 3 (R)¾ in order to harmonize the accounting aspects of operations concerning a business combination, have shown the existence of certain transactions that are not part of the combination itself, which are called “separate transactions”. The definition and delimitation of business combinations “separate transactions” is dispersed in both standards, at times with a little clarifying result. Therefore, this paper aims to facilitate the reader’s understanding of their accounting treatment to address the problem of identifying those transactions that occur, or not, as a result of a business combination, the accounting treatment for this dilemma and its effect on the recognition and valuation of goodwill.

Accounting-based Risk Measurement: An Alternative to Capital Asset Pricing Model Derived Discount Factors

Discount factors have a long tradition of being computed using capital market inputs for the estimation of systematic risk. They are of increasing importance in financial accounting, including the valuation of goodwill and other intangibles. In view of the volatility of stock market returns and their inaccuracy and disjunction from the underlying cash flows of the firm, this paper proposes an alternative accounting-based approach: accountingbased risk measurement. Alternatives to beta are computed from planning and budgeting metrics at firm level to produce consistent risk estimates factoring patterns of revenue and cost behaviour weighted according to their impact on the accounting rate of return. This approach is contrasted with the analysis and interpretation of asset betas in the corporate finance literature.

Accounting Based Risk Measurement: An Alternative to CAPM Derived Discount Factors

Discount factors have a long tradition of being computed using capital market inputs for the estimation of systematic risk. They are of increasing importance in financial accounting, including the valuation of goodwill and other intangibles. In view of the volatility of stock market returns and their inaccuracy and disjunction from the underlying cash flows of the firm, this paper proposes an alternative accounting based approach: accounting based risk measurement (ABRM). Alternatives to beta are computed from planning and budgeting metrics at firm level to produce consistent risk estimates factoring patterns of revenue and cost behaviour weighted according to their impact on the accounting rate of return. This approach is contrasted with the analysis and interpretation of asset betas in the corporate finance literature.

Discount Rates in Disarray: Evidence on Flawed Goodwill Impairment Testing

Carlin and Finch, this issue, compare goodwill impairment discount rates used by a sample of large Australian firms with ‘independently’ generated discount rates. Their objective is to empirically determine whether managers opportunistically select goodwill discount rates subsequent to the 2005 introduction of International Financial Reporting Standards (IFRS) in Australia. This is a worthwhile objective given that IFRS introduced an impairment regime, and within this regime, discount rate selection plays a key role in goodwill valuation decisions. It is also timely to consider the goodwill valuation issue. Following the recent downturn in the economy, there is a high probability that many firms will be forced to write down impaired goodwill arising from boom period acquisitions. Hence, evidence of bias in rate selection is likely to be of major concern to investors, policymakers and corporate regulators. Carlin and Finch claim their findings provide evidence of such bias. In this commentary I review the validity of their claims.

Has Goodwill Accounting Gone Bad?

Prior to SFAS 142, goodwill was subject to periodic amortization and a recoverability-based impairment test. SFAS 142 eliminates periodic amortization and imposes a theoretically more stringent periodic fair-value-based impairment test. We examine the impact of this standard on the accounting for and valuation of goodwill. Our results indicate that the new standard results in relatively inflated goodwill balances and untimely impairments. We also find that investors do not appear to fully anticipate the untimely nature of post-SFAS 142 goodwill impairments. Overall, our results suggest that in practice, managers exploit the discretion afforded by SFAS 142 to delay goodwill impairments, causing earnings and stock prices to be temporarily inflated.

The urge to merge and the American Cotton Oil Company

In this article, I review some explanations for the Great Merger Movement (1895–1904) in the United States and confront these using the particularities of one of the prominent companies figuring in this movement: the American Cotton Oil Company. Subsequently, I argue that the literature on the Great Merger Movement by the commentators of the last 50 years may be complemented with an explanation that includes the dynamics of vertical integration, stressing patents and trademarks as protective measures in the transition of the company. As the American Cotton Oil Company case illustrates, the merger process can be explained, at least partially, as a defensive strategy through the centralization of management and the possibility of introducing cost-effective measures.This article emphasizes that accounting practices of the day and the valuation of goodwill, in particular, largely explain the success of the merger.