Relative reliability and the recognisable firm: Calculating goodwill impairment value

Abstract

This paper complements financial accounting research by a qualitative study of financial accounting practices. Its object is goodwill impairment tests (IAS 36) under the influence of International Financial Reporting Standards, which it uses to illustrate how financial accounting is produced. The aim is to investigate how accounting standards are translated into accounting practices, and to investigate how this is reliable. Drawing on actor network theory, the paper proposes calculative practices to be a networked and distributed affair. The study has two main contributions. Firstly, it shows that in the case of goodwill impairment tests, financial accounting is a process of finding, qualifying, stabilizing and calculating traces that often have to be found beyond the company infrastructure of sheets of accounts and the financial ledger. Secondly, it shows that these traces increase reliability when they are recognisable and impersonal. No single person is responsible for the financial calculation and the traces used assume that a firm cannot systematically outperform the broader economy or the history of the firm. It also helps to increase reliability if institutional roles such as auditors and valuation experts tolerate the calculation. Reliability increase when traces and supporting institutional actors that take part in the calculation are at a distance. Because of this production process, readers of financial statements face the following paradox: the things they see are less associated with specific entrepreneurial activities in the firm and more with normalised trends inside and outside the firm. Seeing the firm requires them to look at its past, at negotiated budgets, at its competitors, at industrial outlook, and at the statistical bureaus that compile information on the economic development of industries and countries; they may also have to listen to valuation experts and auditors. Seeing the value of a firm requires actors to look elsewhere.

The Improbability of Fraud in Accounting for Derivatives: A Case Study on the Boundaries of Financial Reporting Compliance

“…Taken together, this literature suggests that, although neutrality (as required by the IASB) and measures with high relevance but limited verifiability may be useful for equity investors (cf. Huikku et al, 2017), such financial reporting is not useful for banking supervision. Watts (2003b) adds to this argument that verifiability is a necessary condition for enforceability of accounting quality, because without verifiability, fraud cannot be established, an aspect that becomes very clear in the HQ case.…”

“…Presenting a specific amount of measurement error created a public reaction and media coverage because accounting numbers are associated with objectivity and a truth dimension, although accounting researchers for some time now have highlighted that accounting does not reflect but creates reality and can therefore not be neutral, objective, or correct in the sense of 'true' (Bayou et al, 2011;Hines, 1988;Macintosh, 2009;Tinker, 1991). Financial reports acquire a notion of objectivity because they are created in networks where no single entity is responsible for their entirety, a notion that Huikku et al (2017) termed relative reliability. Numbers are very persuading (Robson, 1992) and the financial economics in which they are embedded creates trust in their correctness (Porter, 1995).…”

“…Within market logic, Huikku et al (2017) show that markets still find a way to establish the usefulness of a value through relative reliability despite a lack of direct verification. Within regulatory logic, we know that conservatism is favored (Ball, 2016;Wall & Koch, 2000;Watts, 2003bWatts, , 2006 because it ensures solvency and thus has a positive relationship with market stability.…”

“…An alternative understanding of faithful representation is that financial 8 B. Hartmann et al statements are prepared in accordance with an accepted, impersonal procedure that grants 'relative reliability' (Huikku et al, 2017) where compliance with the standard is the central reference element in relation to such acceptance. In our reflections on the HQ case, we extend this discussion by showing how an agreement on the boundaries of compliance may be possible within one logic, confirming Huikku et al's (2017) ideas of a notion of objectivity and relative reliability that is constructed in a network of market actors, but may be problematic across institutional logics because of the high reliance on preparer judgment.…”

“…Meanwhile, the critical literature claims that financial statements cannot be a reflection of true or correct values (Bayou, Reinstein, & Williams, 2011), but instead help to construct financial markets (MacKenzie & Millo, 2003). A third approach to this discussion finds some middle ground by explaining how market actors agree on impersonal calculation procedures that create a notion of 'relative reliability' (Huikku, Mouritsen, & Silvola, 2017), making financial information useful despite its social construction. All three lines of research are centered in market logic or discuss the relation between market and regulatory logic.…”