Goodwill, triggering events, and impairment accounting

Abstract

PurposeThe purpose of this paper is to examine the assessment process for goodwill impairment. The paper evaluates compliance with goodwill impairment tests required under the Statement of Financial Accounting Standard 142 and International Accounting Standard 36, highlighting challenges encountered in complying with these standards. The paper explores areas in which improvements might be made in both goodwill‐impairment compliance and disclosures and identifies areas for future research.Design/methodology/approachThe method is exploratory in nature. A combination of data collection, analysis, and interpretation is employed.FindingsThe research highlights a number of features of the impairment testing and measurement process that make implementation a challenge. Triggering events are many and vary greatly in significance and severity. Different valuation models are used and there is little conformity in the selection of discount rates. In some cases, though not consistently, control premiums are used to enhance the indicated market values of reporting units. Some firms may even deny the need for an indicated impairment charge. In all of the cases examined, the paper notes the need for judgmental estimates and the possibility that these estimates might be managed to alter or avoid goodwill impairments, limiting the comparability of results across firms.Practical implicationsThe findings will provide feedback to standard setters and practicing professionals in an effort to improve practice. For investors and creditors, the results should prove helpful in evaluating the likelihood of goodwill impairments. For researchers, the paper identifies certain questions that may provide fruitful avenues for further investigation.Originality/valueThe findings are based on an examination of a large sample of current filings of public companies that has yet to be performed. The observed richness and variation in the practices employed and disclosures provided both broaden and deepen our understanding of goodwill impairment accounting.

Disclosure of Goodwill Impairment under AASB 136 from 2005–2010

“…The substantial managerial discretion allowed in the impairment regime has been severely criticised (see, for example, Watts ; Haswell and Langfield‐Smith ; Bloom ; Comiskey and Mulford ; Lhaopadchan ; Vanza et al. ; Izan et al.…”

“…In particular, Watts (: 21) stated that assets values and goodwill estimated for impairment testing are ‘unverifiable and extremely subjective’, and allocating goodwill to reporting units is arbitrary. Moreover, the unverifiable discretion in the impairment regime is subject to manipulation, which could result in avoidance, alteration or deferment of goodwill impairment (see, for example, Ramanna and Watts ; Bloom ; Comiskey and Mulford ). Also, Ramanna and Watts () found evidence consistent with managerial opportunism by demonstrating that the discretion allowed in the impairment regime has been used to avoid timely goodwill impairment when managers have agency‐based motives to do so.…”

Goodwill and Mandatory Disclosure Compliance: A Critical Review of the Literature

“…One reason could be the suspicion that users have with regard to the information from the current rules of the accounting treatment of goodwill, given the alleged existence of earnings management in its initial and subsequent measurement, not only in the year of transition to the new accounting treatment (Jordan and Clark ; Sevin and Schroeder ; Jordan et al. ), but especially in the later stages of that transition (Hayn and Hughes ; Ramanna ; Comiskey and Mulford ; Jahmani et al. ; Petersen and Plenborg ; Ji ; Pardo and Giner ).…”

“…But if the standard-setting institutions consider that the new rules for goodwill accounting improve the quality of financial information, and the empirical studies find contrary empirical evidence, that is, some quality of information loss (KPMG 2014), the following question is raised: why will the market react this way to the new accounting treatment of goodwill, which seems to have been designed to meet investors' information requirements? One reason could be the suspicion that users have with regard to the information from the current rules of the accounting treatment of goodwill, given the alleged existence of earnings management in its initial and subsequent measurement, not only in the year of transition to the new accounting treatment (Jordan and Clark 2004;Sevin and Schroeder 2005;Jordan et al 2007), but especially in the later stages of that transition (Hayn and Hughes 2006;Ramanna 2008;Comiskey and Mulford 2010;Jahmani et al 2010;Petersen and Plenborg 2010;Ji 2013;Pardo and Giner 2013). Another reason, probably stronger than the previous one, has to do precisely with the high level of failure in disclosing information to the market on goodwill impairment.…”

Delayed Goodwill Impairment Charges: An Examination of the Declined Market Capitalization

“…For example, Comiskey and Mulford (2010), in their analysis of disclosure of triggering events for goodwill impairment test by US listed companies, explain that the triggering events vary from company to company. In addition to the market capitalization, other factors, such as the duration and severity of the decline (Latham & Watkins, 2009) and the performances of the reporting units or the CGUs containing goodwill also play their roles in the recognition of goodwill impairment losses (Comiskey & Mulford, 2010).…”