The Adoption of IFRS 3: The Effects of Managerial Discretion and Stock Market Reactions

Abstract

In recent years, several accounting standards, including IFRS 3, issued by the IASB, substitute historical cost with fair value measures and so provide managers with increased discretion to determine fair value without an actual market for the asset. Using Swedish data, we document the accounting consequences of the adoption of IFRS 3 and the stock market's reaction. After the adoption of this standard in January 2005 the amount of capitalized goodwill increased substantially. Goodwill impairments under IFRS are considerably lower than goodwill amortizations and impairments made under Swedish GAAP. Consequently, the adoption of IFRS 3 increased reported earnings. An analysis of economic incentives influencing the impairment decision at the initial adoption of IFRS 3 shows that tenured management is negatively associated with the impairment decision. However, most firms did not reclassify goodwill or make additional impairments. Firms with substantial amounts of goodwill yielded abnormally high returns despite abnormally low earnings. Investors seem to, correctly or incorrectly, have viewed the accrual-based increase in earnings stemming from IFRS 3 as an indication of higher future cash flows.

Mergers, taxation and accounting performance: Some evidence from Greece

“…The relevant IAS is the IFRS 3 -Business Combinations, which is designed to determine the accounting when an acquirer obtains control of a business (M&As). It sets out the principles on the recognition and measurement of acquired assets and liabilities, and the determination of goodwill with the use of the "acquisition method", which requires assets acquired and liabilities assumed to be measured at their fair values at the acquisition date (Hamberg et al, 2011).…”

Analisis dan Tren Penggunaan Accounting Choice yang dilakukan Perusahaan di Indonesia Pasca Adopsi IFRS

“…Lebih lanjut, penelitian ini menunjukkan bahwa ukuran perusahaan berhubungan dengan pemilihan fair value, sedangkan market-to-book ratio berkorelasi negatif dengan pemilihan fair value, sedangkan leverage tidak terbukti memengaruhi pemilihan accounting choice tersebut. Sedangkan Hamberg, et al (2011) mendokumentasikan pilihan menggunakan historical cost atau fair value terkait dengan goodwill impairment yang diatur dalam IFRS 3 dengan menggunakan data perusahaan Swedia. Penelitian Hamberg menunjukkan bahwa goodwill impairment setelah diterapkannya IFRS 3 menunjukkan penurunan dibandingkan dengan beban amortisasi goodwill jika menggunakan standar sebelumnya.…”

The impairment test of goodwill: an empirical analysis of incentives for earnings management in Italian publicly traded companies

“…In the case of IFRS, the accounting treatment of goodwill in the first year of IFRS introduction was different 1 which makes these research findings not generalisable. In the European environment, this problematic domain, with an emphasis on companies reporting under IFRS, has only been dealt by Verriest and Gaeremynck (2009), Van de Poel et al (2009), Lemans (2009), Hamberg, Paananen & Novak (2011, and AbuGhazaleh, Roberts & Hares (2011).…”

“…Since, the inclusion/exclusion of goodwill in covenants is not often disclosed (Ramanna & Watts, 2011), authors often tend to use as a proxy the debt ratio (Zang, 2008;Godfrey & Koh, 2009) or financial leverage ratio (Hamberg et al, 2011). Only Beatty and Weber (2006) and Ramanna and Watts (2011) analysed the impact of covenant slack on goodwill impairment.…”