Goodwill and accounting discretion

Abstract

<p>Purpose: The aim of the paper is to investigate earnings management practices related to goodwill accounting, focusing on its first recognition as well as its write-offs, due to the impairment test.</p><p>Design/methodology/approach: The study refers to a sample of Italian listed firms and the analysis covers three years, with a total of 591 firm-year observations. The modified Jones’ regression model has been used in estimating discretionary accruals, as a proxy of earnings management practices.</p><p>Findings: A positive relationship between discretionary accruals and yearly changes in goodwill has been proved. Findings also show an incidence of leverage and performance.</p><p>Research limitations/implications: The study focuses on a single context (Italy) and it is essentially based on financial-economic variables.</p><p>Practical implications: Findings of the study could be relevant for standard-setters in future revisions of goodwill accounting.</p><p>Social implication: The study could support investors in evaluating the incidence of first recognition as well as goodwill impairment on the quality of earnings.</p>

Habilidade Gerencial E Perdas Do Valor Recuperável Do Goodwill:

“…On the other hand, a CEO in his final year in office can inflate reported earnings to increase the value of the company's stock options as well as his personal value in the managerial job market. Therefore, a negative association between CEOs in the final year of their mandate and goodwill losses is expected (AbuGhazaleh et al, 2011). In this sense, Ramana and Watts (2012) concluded in their study that the reputation of executives, as well as their behavior and rewards associated with financial results influence the recognition of goodwill impairment losses.…”

“…Thus, cash flows are expected to be a key economic indicator that contributes to determine the impairment value of goodwill, as the estimated value-in-use strongly depends on the projected cash flow. Therefore, a smaller-than-expected cash flow generation will increase the likelihood of goodwill impairment (AbuGhazaleh et al, 2011;Kabir & Rahman, 2016). In the opposite sense, with higher cash flows, the value in use of the assets would also be higher and would thus reduce the recognition of these losses.…”

“…Therefore, a reduction in sales, operating cash flow and ROA indicate negative changes in the performance of the company as a whole and may represent financial problems. Therefore, these situations are usually associated with higher impairment losses of goodwill (AbuGhazaleh, Al-Hares & Roberts, 2011;Majid, 2015;Kabir & Rahman, 2016).…”

“…In relation to indebtedness, companies with higher levels of indebtedness are prone to accounting choices that maximize their results and, therefore, tend to underestimate impairment losses, particularly if debt is tied to restrictive clauses, so-called contractual covenants (Zang, 2008;AbuGhazaleh et al, 2011;Avallone & Quagli, 2015). The logic is that companies that are close to violating their debt agreements will be less likely to report goodwill impairment losses (Majid, 2015).…”

“…In addition, the relief of these expenses in the future would increase the opportunity to show superior results in subsequent periods. Thus, there may be a positive association between CEOs in the first year of their mandate and goodwill losses (AbuGhazaleh et al, 2011).…”