Discretionary goodwill impairment losses in Europe

Abstract

Purpose The impairment-only approach to goodwill has regularly been criticized for offering too much discretion to managers and facilitating the manipulation of goodwill impairment losses. Extant research provides mixed results on whether managers exploit their inherent discretion informatively or opportunistically. The purpose of this paper is to examine the determinants of discretionary goodwill impairment losses in Europe. Design/methodology/approach The authors divide goodwill impairment losses into economically induced and discretionary parts. Thereafter, the authors examine the determinants of discretionary goodwill impairments. Findings The results indicate that discretionary goodwill impairment losses are used opportunistically rather than informatively. The authors find that managers exploit their discretion to “clear the deck” and to meet or beat analysts’ forecasts. However, the opportunistic behavior is constrained by corporate governance and enforcement mechanisms. Research limitations/implications The findings contribute to the current discussion on the suitability of the impairment-only approach by introducing inferences on how areas of discretion inherent in goodwill impairment testing are associated with management incentives and governance mechanisms in a European setting. Practical implications The results offer enforcers and standard-setters important insights into how mangers exploit discretion in goodwill accounting. These insights can help to identify firms that are likely to infringe upon the applicable accounting standards. Originality/value In contrast to prior research, the authors analyze the association among management incentives, governance mechanisms and discretionary goodwill impairment losses rather than the association with total or expected goodwill impairment losses. Moreover, to the best of authors’ knowledge, there is little empirical evidence based on a European (IAS 36) setting.

Accounting for goodwill: A literature review

“…However, they do not confirm that firms use this discretion when they transmit their private information. In the scope of the IFRS, Gros and Koch (2019) do also find that managers act opportunistically "to clear the deck" and to meet or beat analysts' forecasts. Giner and Pardo (2015) find that opportunistic behaviour among Spanish managers is related to "big bath" and "income smoothing" theories, and also that firm size affects managers' decisions because of the cost and complexity of running the impairment test.…”

“…On the other hand, some authors identify some mechanisms to mitigate discretionary behaviours, such as the implementation of strong governance mechanisms (AbuGhazaleh, et al, 2011;Glaum, et al, 2018;Gros & Koch, 2019;Gu & Lev, 2011;Kabir & Rahman, 2016;Verriest & Gaeremynck, 2009), the systematisation of procedures in the implementation of the impairment test (Petersen & Plenborg, 2010), the independence of boards and audit committees (Abdul, 2017) and auditing enforcement system (Glaum, et al, 2018). In addition, authors such as Avallone and Quagli (2015) insist that a higher level of disclosure and, specifically, higher compliance with standard requirements improve the accuracy that firms use in the impairment test of goodwill.…”

Análise Do Impacto Do Goodwill Na Previsão De Lucro Por Analistas Financeiros:

“…Assim, como os gestores tendem a exercer o arbítrio oportunisticamente (teoria da agência), os gestores podem utilizar o discernimento próprio (Gros & Koch, 2019) e comprometer a transparência dos dados e limitar a percepção do analista em relação à realidade financeira da empresa, uma vez que a única forma dele ter contato com essas informações é caso a empresa as divulgue (Andreicovici et al, 2020).…”

“…Entretanto, essa divulgação pode não ser interessante para os gestores, pois, por meio dessa assimetria de informações eles conseguem agir discricionariamente de forma oportunista em prol de vantagens pessoais, como bônus e promoções (Gros & Koch, 2019;Andreicovici et al, 2020). Sendo assim, foi elaborada a primeira hipótese de pesquisa: H1: O reconhecimento de goodwill impacta a acurácia da previsão de lucro do analista.…”

“…A amostra inicial foi reduzida, conforme apresentado na Tabela 1, para o valor final de 89 empresas brasileiras e 1170 empresas norte-americanas. ACi,t = Representa a acurácia de previsão do analista, estimado conforme Equação 1; GWi,t-1 = Representa o goodwill, que foi estimado pela razão do valor total de goodwill liquido da empresa no período pelo ativo total da empresa naquele período, onde é esperado uma relação negativa com a acurácia, devido ao elevado grau de incerteza e complexibilidade de estimação (Chen et al, 2015;Gazzoni Júnior et al, 2019;Gros & Koch, 2019;Andreicovici et al, 2020).…”