Systematic Amortization Research Articles

Stakeholder’s Perception of Subsequent Goodwill Measurement: An Analysis of IASB Comment Letters

Goodwill is the most intangible of intangibles and continues to generate great debate in academic, business, and regulatory circles, with no consensus on its subsequent measurement. In early 2020, the International Accounting Standards Board (IASB) published a discussion paper entitled DP/2020/1 Business Combinations – Disclosures, Goodwill and Impairment, to gather input on more useful disclosures on business combinations, bringing back to the discussion the subject of the subsequent measurement of goodwill. The IASB received comments on its proposed disclosures, as well as new evidence and arguments on how to account for goodwill, having received 193 comment letters from a wide range of stakeholders. This study aims to analyse the perception of those interested parties about the subsequent measurement of goodwill proposed by the IASB, as well as the arguments used for its reasoning. For this purpose, the content of stakeholder’s comment letters was analysed and classified as academics, auditors, investors, standard setters, preparers, regulators/securities, and others, and by region. In addition, the preparers’ comment letters were subclassified by sectors of activity to identify differences in the perception of preparers by industry. These differences point to the need to reflect on the existence of more than one goodwill measurement model, which best fits the sector of activity, a pioneering aspect in research on goodwill. The results reveal a preference trend for the systematic amortisation of goodwill. In all categories of stakeholders, apart from the "Others", the preference is for the reintroduction of goodwill amortisation. Similarly, most stakeholders in the Americas, Asia, Europe, and Oceania are in favour of reintroducing the systematic amortisation of goodwill. In some industries (Automotive, Banking, Luxury Goods, Electrical Appliances, Energy and Technology) no preparer prefers the impairment-only model, which suggests that perhaps in those sectors of activity, this model is not suitable. This study contributes to the literature on the subsequent measurement of goodwill, as well as to the different stakeholders, by presenting, under different perspectives of analysis, the respondents' preferences on the subsequent measurement of goodwill, as well as the arguments in favour of each model.

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.

Discretion in the application of the goodwill impairment test in European banks

In the absence of amortization of goodwill, the purpose of this study is to identify whether the impairment test was applied uniformly between 2005 and 2015 at the 45 biggest banks in Europe, during the first decade of IFRS application. Likewise, an attempt has been made to verify whether such application has been insufficient and late. Through a significant sample, statistical tools already widely used in other studies have been applied to contrast the behavior of entities. The results obtained show that impairment policies have been applied unevenly in each of the countries. These conclusions could support the return to a valuation pattern that takes into account the systematic amortization of goodwill, apart from its impairment. This paper reveals how impairment in European banks has been recognized during a crucial period of time that includes a major financial crisis. The study suggests a discretionary and opportunistic implementation of accounting regulations which does not reveal the economic conditions inherent to the financial activity of the leading European banks, making comparability difficult and, ultimately, making the financial information less relevant.

Economic effects of goodwill accounting practices: systematic amortisation versus impairment test

ABSTRACT Under IFRS, an impairment test is the only method applied to reduce goodwill. However, while the IASB have asked for comments about re-introducing the systematic amortisation method, European directives have already adopted its application. In this dual regulatory framework, we examine whether there are significant differences between the two methods that could affect the comparability of financial statements and their ability to faithfully represent the firm performance. Using a sample of 90 Spanish-listed firms over the period 2004–2011, the panel data technique and t-Student test confirm that under the impairment test, firms are likely to maintain higher amounts of goodwill and not recognise any impairment loss. Consequently, ROA and ROE are higher and leverage is lower. In addition, findings suggest that firms do not correctly implement this method to transmit private information about their economic situation. Results show that the better firm performance is the larger goodwill impairment will be.

(IR) Relevance of goodwill impairment: the case of European banking (2005–2015)

The traditional model of systematic amortization over its useful life was replaced by the annual application of an impairment test, with the intention of correcting the problems of the lack of relevance and difficulty in estimating said useful life of the previous regulatory framework. The aim of this study is to investigate whether the application of the impairment test between 2005 and 2015 in the main European banks has overcome these problems or whether, on the contrary, its application by managers has been discretionary, opportunistic and arbitrary, presenting, as a result, artificially inflated earnings. Our results obtained show that systematic amortisation has been replaced by opportunistic impairment, which does not reflect the economic conditions underlying the financial activity of the main European banks, which gives rise to less relevant financial information and possible harmful pro-cyclical effects.

The Economic Effects of IFRS Goodwill Reporting

AbstractThe promotion of the international harmonisation of goodwill accounting has led to the approval of SFAS 141 and 142 and IFRS 3, IAS 36 and IAS 38. The aim was to improve the quality and comparability of financial statements through these standards by eliminating the pooling of interests method and substituting the application of amortisation with an annual impairment test. However, recent decisions by regulating bodies such as the FASB, the IASB and the European Parliament have compromised this harmonisation. Currently, steps are being taken to reintroduce systematic amortisation in conjunction with the impairment test. In this dual normative scenario, where two accounting methods coexist (impairment test or amortisation), we analyse the economic consequences of the application of one method over the other in the information transmitted by the firms listed in the Spanish securities market. The contrast of two periods, pre‐IFRS (1998 to 2004) and post‐IFRS (2005 to 2011), reveals that the application of either of these methods affects financial statements and the usefulness of the information. Therefore, the possibility of opting for one or the other could distort the quality and comparability of the information transmitted by firms and the accurate assessment of future cash flows.

THE VALUE RELEVANCE OF PURCHASED GOODWILL IN MALAYSIAN FIRMS: THE PRE- AND POST-IFRS EVIDENCE

ABSTRACT Following the adoption of International Financial Reporting Standards (IFRS) in Malaysia, the accounting for goodwill has changed from systematic amortisation to a method based solely on periodic impairment testing. The objective of the impairment test is to ensure that reported goodwill does not have carrying amount in excess of its recoverable amount. Nevertheless, many critics suggest that the new method may allow managements to engage in opportunistic earnings manipulation activities. In this study, we examine the question of whether goodwill is more value relevant after adoption of an IFRS in Malaysia. Using panel data of non-financial firms listed on the Bursa Malaysia over the period from 2002 to 2010, we find evidence that goodwill is not value relevant in either the pre-and post IFRS periods. These findings are in line with the opponents of the new standards, who claim that, the use Fair Value Accounting (FVA) in the reporting of goodwill increases the opportunities for managerial opportunisms. Therefore, the consequences FVA devoid of relevant information for shareholders. We conclude that the existence of an unfavorable environments in Malaysia impedes efficient implementation of the new impairment regime. Keywords Cash Generating Units, Fair value, Emerging Markets, Standard setters, MFRS 3, Value relevance

How Ethical are Managers’ Goodwill Impairment Decisions in Spanish-Listed Firms?

This article provides an analysis of the ethical behavior of managers making goodwill impairment decisions following the adoption of the International Financial Reporting Standard (IFRS) 3 on Business Combinations. Replacing the systematic amortization of goodwill with the impairment-only approach has been a highly controversial step. Although the aim of IFRS 3 was to provide users with more value-relevant information regarding the underlying economics of the business, it has been criticized for the potential earnings management inherent in impairment testing. This study is based on a sample of Spanish-listed companies between 2005 and 2011, a period that embraces the economic crisis. After controlling for the underlying economic factors of the firms, the results suggest that managers are exercising discretion in the reporting of goodwill impairment losses, and big bath and smoothing strategies are influencing the decisions, whether or not to impair goodwill and about the magnitude of the impairment. Firm size is an attribute that appears significant in the analysis, suggesting that the cost and complexity of running the impairment test affect managers’ decisions. Additional analyses suggest that the macroeconomic environment influences opportunistic and unethical behaviors.

Functional Fixation Surrounding the Adoption of SFAS 142

Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangibles (FASB 2001) altered the treatment of goodwill by replacing the systematic amortization of goodwill with impairment testing. This change affected earnings in two ways by requiring many firms to take sizable goodwill impairments if they cannot justify the amount of goodwill being carried on their balance sheets and by producing a “cosmetic” boost to the earnings of all firms who previously amortized goodwill. This study investigates whether investors assign value relevance to adoption-year goodwill impairments and to the increase in earnings resulting from goodwill non-amortization. Furthermore, this study investigates whether the assigned value relevance is due to new information content or due to functional fixation. Results indicate that unsophisticated investors functionally fixate on earnings while sophisticated investors do not, and that investors find value relevant information in goodwill impairments.

The effect of SFAS 142 on the ability of goodwill to predict future cash flows

This study examines the effect of Statement of Financial Accounting Standards No. 142 (SFAS 142) on the ability of goodwill to predict future cash flows. SFAS 142 allows substantial managerial discretion and leads to a significant magnitude of economic impact on financial statements, resulting in critical debates over the consequence of its adoption. I find that the ability of goodwill to predict future cash flows has improved since the Financial Accounting Standards Board (FASB) adopted SFAS 142. Furthermore, sub-sample analyses fail to reveal compelling evidence that reporting discretion induced by SFAS 142 is used opportunistically or informatively, contrasting with the pervasive view based on the opportunistic reporting hypothesis. Overall, contrary to the position of critics of SFAS 142, the results support the view taken by the FASB and proponents of SFAS 142: eliminating systematic amortization and adopting fair value estimates improve representational faithfulness of goodwill reporting.

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.

La norme IFRS 3 a-t-elle amélioré le contenu informatif du goodwill ?

This study aims at investigating the effect of goodwill accounting on the usefullness of earnings data as an indicator of share value for a large sample of french listed companies over the 2001-05 period. This issue is of special interest because, since the first January 2005, the IASB issued the IFRS N? 3 which modifies the method of accounting for goodwill from systematic amortization of goodwill to an approach that requires annual testing for impairment. Our results suggest that the goodwill impairment is not a best appropriate accounting treatment than amortization for conveying information about firm value.

Has Goodwill Accounting Under SFAS 142 Improved Financial Reporting?

SFAS 142 made two significant changes to goodwill accounting. First, firms are required to annually test goodwill for impairment. Second, firms are prohibited from systematically amortizing goodwill. In this study, I test whether each of these changes resulted in improved financial reporting, as predicted by the FASB. I find evidence that annual impairment testing improves financial reporting. However, I also find evidence that elimination of systematic amortization reduced the quality of financial reporting. As additional analysis, I demonstrate that a goodwill accounting system that allows both annual impairment testing and systematic amortization, while allowing firms the discretion to choose a firm-specific mix of each, provides the most value relevant goodwill accounting numbers.

The Impairment of Purchased Goodwill: Effects on Market Value

This paper examines the value relevance of goodwill impairment and the information content of impairment announcements with the introduction of Financial Reporting Standard (FRS) 11 in the UK in 1998 which allowed an annual impairment review as an alternative to capitalisation and subsequent systematic amortisation of goodwill. In contrast to systematic amortisation of capitalised goodwill, our results suggest that goodwill impairment is associated with economically significant reductions in market value. We also find evidence of a significant negative market reaction to goodwill impairment announcements. The negative impact is greater for firms with a higher proportion of assets carried as goodwill and for firms that release little information prior to the announcement. Our results also confirm previous findings that capitalised goodwill is significantly associated with market value in the year of acquisition, but weakens thereafter; and that systematic amortisation of capitalised goodwill is not value-relevant.

Goodwill Amortization and the Usefulness of Earnings

This study provides evidence of the effect of goodwill amortization on the usefulness of earnings data as an indicator of share value for a large sample of publicly traded companies over the 1993–98 period. This issue is of special interest because the Financial Accounting Standards Board recently adopted new accounting standards that eliminate the systematic amortization of goodwill in favor of a requirement to review goodwill for impairment when circumstances warrant. We found that earnings before goodwill amortization explain significantly more of the observed distribution of share prices than earnings after goodwill amortization and that when share valuations are based on earnings alone, goodwill amortization simply adds noise to the measure. These results suggest that eliminating goodwill amortization from the computation of net income will not reduce its usefulness to investors and analysts as a summary indicator of share value.

Equity Valuation Models and Measuring Goodwill Impairment

Views Icon Views Article contents Figures & tables Video Audio Supplementary Data Peer Review Share Icon Share Twitter LinkedIn Tools Icon Tools Get Permissions Cite Icon Cite Search Site Citation AAA Financial Accounting Standards Committee; Equity Valuation Models and Measuring Goodwill Impairment. Accounting Horizons 1 June 2001; 15 (2): 161–170. doi: https://doi.org/10.2308/acch.2001.15.2.161 Download citation file: Ris (Zotero) Reference Manager EasyBib Bookends Mendeley Papers EndNote RefWorks BibTex toolbar search Search Dropdown Menu nav search search input Search input auto suggest Search

On a class of loans with a systematic amortisation schedule

In this paper we show that a single set of formulas will characterise a wide range of standard loans. This makes it possible to describe these loans in a compact manner and facilitates the design o...