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

Abstract

IFRS 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 role of corporate governance in accounting discretion under IFRS: Goodwill impairment in Australia

“…While Chalmers et al (2011) find that goodwill impairment loss better reflects economic reality than goodwill amortisation does in Australia, we do not know whether this finding holds across all firms irrespective of the strength of corporate governance. Therefore, we examine whether the associations between goodwill impairment loss and the proxies for economic reality are contingent upon the strength of the firm's corporate governance.…”

“…This paper makes three contributions to both the goodwill impairment and corporate governance literature. First, while prior studies (Beatty and Weber, 2006;Chalmers et al, 2011;Godfrey and Koh, 2009) report that goodwill impairment loss is associated with proxies of economic realities, we document that the associations between goodwill impairment loss and economic indicators of goodwill impairment are more likely to be observed in firms with stronger corporate governance than for those with weaker governance. Second, the corporate governance and financial reporting literature shows that corporate governance improves financial reporting quality (Brown et al, 2011).…”

“…Chalmers et al (2011) find that goodwill impairment loss reported by Australian companies is associated with investment opportunities. Carlin and Finch (2009), on the other hand, argue that management chooses the discount rate for goodwill impairment testing opportunistically, such that they do not have to recognise any impairment.…”

“…While Chalmers et al (2011) document that goodwill impairment loss under AASB 136 reflects the underlying economic attributes of goodwill, the United States studies (Beatty and Weber,6 Seventeen of their 200 sample companies used the fair value approach, seven used both fair value and value-in-use, and the remaining nineteen did not disclose the estimation approach (Carlin and Finch, 2008).…”

A review of research on regulation changes in the Asia‐Pacific region

“…In contrast, however, Chalmers et al (2011) find that a goodwill impairment regime has had the opposite effect. The regulation from IFRS appears to not have had the same unintended consequences documented by Anderson and Zimmer (1992), in that the purpose of better reflecting the economic reality of goodwill has been met, and Australian firms appear to be complying with the standards.…”