The Recognition of Goodwill and Other Intangible Assets in Business Combinations – The Portuguese Case

Abstract

In this study, we investigate the magnitude of goodwill recognised in business combinations during the years 2005 to 2009 by the Portuguese companies listed on Euronext Lisbon, and characterise the amount of the other intangible assets recognised separately from goodwill. We also analyse the level of compliance of those companies with the main disclosure requirements of International Financial Reporting Standard (IFRS) 3 -Business Combinations. Our study, which involves the analysis of 197 business combinations, reveals that the amounts of goodwill continue to be highly material, while conversely, the value of identifiable intangible assets in those acquisitions is very low. The results suggest that Portuguese companies do not undertake sufficient efforts to individually identify and disclose intangibles acquired in business combinations. This fact is reinforced by the reduced level of compliance with the disclosures required by IFRS 3, particularly the factors that contribute to the recognition of goodwill. Our findings provide feedback to standard setters in an effort to improve practice in the application of IFRS 3. Moreover, they reinforce their recent concerns regarding the post-implementation review of business combinations, as well as the ongoing project of the IASB, whose objective is to improve disclosures in existing standards.

If You Can Measure It, You Can Manage It: A Case of Intellectual Capital

“…; Carvalho et al. ). It is only recently that researchers have started to explore this topic and have realised that IC is not only the driver of a firm's progress but also enables a firm to build a competitive advantage.…”

“…I ntellectual capital (IC) is recognised as a vital contributor to the financial performance of a firm. It has previously been ignored because conventional accounting standards such as Financial Reporting Standards (FRS 138) restrict the disclosure of intangible assets (except goodwill) on firms' balance sheets (Wang and Chang 2005;Shiu 2006;Gigante 2013;Joshi et al 2013;Carvalho et al 2016). It is only recently that researchers have started to explore this topic and have realised that IC is not only the driver of a firm's progress but also enables a firm to build a competitive advantage.…”

Impairment Losses: The Impact of First‐time Adoption of the Accounting Standardisation System in Portugal

“…Carvalho et al. () provide an extensive and systematic literature review on goodwill and mandatory disclosure compliance and they corroborate these findings, concluding that enforcement mechanisms must be reinforced in order to improve information quality.…”

“…Moreover, Carvalho et al. () stress several reasons for these levels of non‐compliance, such as: heterogeneity of disclosures among companies and countries; potential cultural phenomenon impacting on different reporting styles; disclosure of scarce, vague, incomplete and inadequate information, basically due to the technical complexity surrounding impairment testing; or even reporting ‘formula’ that has remained virtually unchanged over the years.…”

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

“…In the last few years, owing to the relevance of goodwill in many companies’ balance sheets (e.g., PricewaterhouseCoopers (PwC) in 2007, 2010, 2011; Carvalho et al. ) and the complexity and subjectivity associated with their impairment tests, several empirical studies have emerged that analyse, from various perspectives, goodwill's mandatory disclosures in companies with listed securities.…”