Goodwill under IFRS: Relevance and disclosures in an unfavorable environment

The accounting treatment of purchased goodwill under IFRS has been severely criticized due to the extensive use of fair value accounting. The purpose of this study is to enrich the ongoing debate upon this issue by drawing attention to the market valuation implications of goodwill in a country outside the Anglo-Saxon accounting paradigm, where the application of fair value accounting has been seen as more problematic. The results indicate that, in the case of purchased goodwill, fair value accounting generates relevant accounting numbers but only in companies that comply highly with IFRS disclosure requirements.     

Is older goodwill value relevant?

Although previous research has generally found that goodwill reported in firms’ financial reports is relevant to equity valuation, no known studies have directly examined whether the value‐relevance of purchased goodwill holds as it ages. We examine this issue in the Australian context to determine whether the market attaches different values to the components of Australian firms’ goodwill when it is disaggregated into different ‘ages’. Our results suggest that recently acquired goodwill has information content whereas ‘older’ goodwill does not. Our findings have implications for goodwill accounting practice and recent changes to goodwill accounting standards.     

A POLITICAL ECONOMY OF SSAP22: ACCOUNTING FOR GOODWILL

In late 19th century Britain it was widely accepted by leading authorities that «goodwill» was simply the purchase of sufficient expected «surplus profits» to persuade the owners of a business to part with its net assets and control, and that this expenditure should be capitalized and amortized against those surplus profits as they are realized. Although this method remains the conventional wisdom, and dominates current international regulation and practice, its conceptual foundation appears lost to modern scholars, for whom the «problem» of accounting for goodwill is «insoluble». In the first part of the paper the concepts of Marx's political economy are employed to elaborate the conventional method, which is argued to be necessary to allow the capital markets to observe the generation and realization of profit and the rate of return on capital. From this perspective, the heavily criticized decision of the UK authorities in SSAP22 to encourage the write-off of goodwill against capital is an anomaly requiring explanation. It is usually explained as either the ASC's acceptance of economic income accounting as the ideal for financial reporting, or its acquiescence to powerful managerial interests. In the second part, these explanations are criticized, and an alternative hypothesis advanced which is consistent with the limited evidence available. That, although the capital markets usually want purchased goodwill to be capitalized and amortized, in the peculiar circumstances of the UK, where unusually large portions of its manufacturing industry were closed or run down in the acquisitions and merger boom of the 1980's, writing-off purchased goodwill against capital was in the collective interest of investors because it helped to hide from public view the fact that dividends were being paid from capital.     

Did the goodwill accounting standard impose material economic consequences on Australian acquirers?

This research explores the empirical association between takeover bid premium and acquired (purchased) goodwill, and tests whether the strength of the association changes after the passage of approved accounting standard AASB 1013 in Australia in 1988. AASB 1013 mandated capitalization and amortization of acquired goodwill to the income statement over a maximum period of 20 years. We use regressions to assess how the association between bid premium and acquired goodwill varies in the pre‐AASB and post‐AASB 1013 periods after controlling for confounding factors. Our results show that reducing the variety of accounting policy options available to bidder management after an acquisition results in a systematic reduction in the strength of the association between premium and goodwill.     

Goodwill—an Example of Puzzle-Solving in Accounting—a Comment

Ma and Hopkins' (1988) paper on accounting for goodwill derives insupportable conclusions because its analysis is based on an inappropriate paradigm. This comment presents a supportable rationale for capitalization and amortization of purchased goodwill and concludes that the 'unsolved puzzle' that Ma and Hopkins present is likely to be a corroborating example for the 'old' matching-based paradigm and a confounding example for the 'new' valuation-based alternative.     

REACTIONS TO REGULATION OF ACCOUNTING FOR GOODWILL

Regulations designed to achieve “uniformity in practice” in Australian firms' reporting of goodwill were first adopted in 1985 with the introduction of AAS18. Because of the requirement to amortise purchased goodwill, a number of firms either did not comply or took evasive actions to mitigate the effects of the standard. This paper documents and explains the pre-regulation cross-sectional variation in accounting practices. Reactions to the set of regulations introduced between 1985 and 1989 are then described and explained through a longitudinal study of accounting policy choice. We develop hypotheses which explain why the goodwill accounting rules reversed relations between the accounting methods adopted by firms and both the earnings effect of compliance and the market value of the firm's goodwill. The results are confirmatory.     

资产负债表债务法在企业合并所得税会计中的应用

新会计准则中,明确规定企业所得税核算采用资产负债表债务法,并规范了商誉的计量。但是对企业合并时,合并商誉对所得税的影响如何确认和计量未作规范。本文结合企业合并时对商誉的会计处理,初步探讨了其对所得税影响的确认和计量在资产负债表债务法下确认和计量的方法。     

商誉的内涵及其确认问题探讨

本文立足于商誉问题的既有文献,在对商誉构成进行深入探讨的基础上,尝试对商誉的确认进行拓展性的分析。本文首先对商誉进行了分解,指出商誉的构成应更"干净化",应该只包括"合并商誉"和被并购企业的自创商誉。前者的确认是因为存在客观的证据,而后者是因并购行为而得以显性化。以此为基础,本文探讨了商誉是否应该在财务报表上确认为一项资产、如何进行初始确认与后续确认等问题。     

Goodwill Accounting in Selected Countries and the Harmonization of International Accounting Standards

Economic and financial markets interpenetrate and national economies are increasingly interdependent. This results in a growing need for comparability of accounting procedures internationally. Accounting for goodwill illustrates this phenomenon. By specifying the recommended asset treatment for purchased, positive goodwill, and the five-year amortization period, IASC has taken a significant step towards harmonization of goodwill accounting. As noted in the article, however, the implications for consolidated income may be quite drastic. This is especially so with respect to the implications of the revised IAS 22 (following IAS ED 32) for potential leveraged corporate buy-outs.     

Assessing the Value of Growth Option Synergies from Business Combinations and Testing for Goodwill Impairment: A Real Options Perspective

Goodwill is an intangible asset, and therefore hard to measure and difficult to account for. This article argues that the two‐stage impairment test for acquired goodwill under SFAS 142 has several limitations. Most important, it measures aggregate rather than acquired goodwill, making it very difficult to separate acquisition‐related goodwill from aggregate enterprise goodwill after a business combination. As a consequence, any potential deterioration of acquired goodwill value could be concealed by increases in internally generated goodwill. As an alternative, the authors propose a real options approach to managing a business unit portfolio as a better framework for conducting the goodwill impairment test. A real options approach to testing goodwill for impairment—as opposed to the standard fair value assessment based on DCF analysis—not only accounts for deterioration in the value of goodwill, but also captures upward potential. It enables tracking of the changes in goodwill value from one period to the next, providing a less biased estimate of its real value at each point in time.     

放松卖空管制能够抑制并购商誉泡沫吗？

本文以我国放松卖空管制作为切入点,系统检验了其对并购商誉泡沫的影响。研究发现,放松卖空管制之后,超额商誉显著下降,同时商誉资产也显著下降,且该效应在民营控股公司中更显著;机制检验发现,卖空通过吸引更多分析师跟踪、增加对管理者的激励来抑制商誉泡沫;进一步研究发现,在市场化水平较高、行业竞争度较低的情形下,卖空机制对商誉泡沫的抑制作用更强。本文的研究结论丰富了卖空和并购商誉领域的文献,并为以市场导向原则化解并购商誉泡沫提供了新思路和新范式。     

Executive compensation and goodwill recognition under IFRS: Evidence from European mergers

Based on principal agent theory we posit that managers account for a business combination opportunistically by recognizing goodwill in excess of its economic determinants. We examine the relationship between CEOs’ short-term cash bonuses and the amount of goodwill recognized in IFRS acquisitions. We find that with increasing cash bonus intensity managers recognize more goodwill. More detailed analysis indicates that this relationship is not a linear one. Instead, there seems to be a corridor in which CEOs are susceptible to the incentive given by bonus payments. In particular, the relationship seems to be fulfilled only for CEOs whose cash bonus is between 150% and 200% of their base salary prior to the acquisition. Our findings have an implication for companies that bonus caps should be introduced to limit CEOs’ bonuses to a given percentage of their base salary. By doing so, they may re-align shareholders’ and managers’ interests and avoid an increased impairment risk in the future.     

The potential harms of goodwill impairment avoidance: Evidence based on future performance and stock prices

The rapidly increasing volume of goodwill assets in the capital market generates potential risks due to the possibility of an untimely recognition of goodwill impairment. In this paper, we investigate the financial consequences of goodwill impairment avoidance based on firms’ future performance and stock prices. Using Chinese A-share listed firms with goodwill balances, we find that avoiding goodwill impairments negatively affects a firm’s performance growth and increases its risk of a future stock price crash. These adverse effects continue for the three years following the goodwill impairment avoidance. Our results indicate that goodwill impairment avoidance has detrimental impacts on a firm’s future performance and stock price and that these impacts are persistent. Our conclusions are helpful for regulators on how to prevent the risks hidden in goodwill impairment recognition and maintain the stable development of the financial market.     

Market Perception of Goodwill: Some Empirical Evidence

Accounting and reporting for goodwill has been on the agenda of the Financial Accounting Standards Board, the International Accounting Standards Committee, the UK's Accounting Standards Board, and the US Congress. Goodwill has also been the subject of Securities Exchange Commission rulings directed at specific companies. The attention directed towards goodwill would suggest that it is a material asset for a large number of firms. This article analyses the market perception of goodwill as an asset in the determination of the firm's valuation. Also explored is whether the market values goodwill to the same degree as it values other assets. The results of this study found that the market perceives goodwill as an asset and incorporates the information in the valuation of a firm. The findings of this study could be of importance to those involved in and affected by standard-setting deliberations involving goodwill.     

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

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.     

Applying Wand and Weber's Surface and Deep Structure Approaches to Financial Reporting Systems

Wand and Weber's fundamental premise is that ‘a physical‐symbol system has the necessary and sufficient properties to represent real‐world meaning’. Their representation of real‐world meaning flows from three possible information system models: representational, state‐tracking and de‐compositional. We address these three types of information system in the context of financial reporting systems and we use purchased goodwill and other intangible assets to selectively critique their characteristics. The principle feature of this critique is the comparison that is made throughout the paper between an economic and an artefactual (physical‐symbol) representation of assets, particularly the intangible ones, in the financial reporting domain.     

Using Real Activities to Avoid Goodwill Impairment Losses: Evidence and Effect on Future Performance

We examine whether managers postpone the recognition of goodwill impairment by manipulating cash flows and the consequences of such a strategy on future performance. According to SFAS 142, an impairment loss must be recognized if the reporting unit's total fair value to which goodwill has been allocated is less than its book value. A growing body of empirical evidence shows that managers delay the recognition of goodwill impairment in accounting books. However, past literature is silent on how managers convince various gatekeepers (e.g., auditors, financial analysts) that recognizing an impairment loss is unnecessary although it seems economically justified. SFAS 142 requires managers to forecast future cash flows to justify the decision to recognize, or not, an impairment loss. Therefore, we predict that managers manipulate upward current cash flows to support their choice to avoid reporting an impairment loss. We also test whether or not this real earnings management is detrimental to future performance. Based on a sample of US firms over the period 2003–2011, we document that firms suspected of postponing goodwill impairment losses exhibit significantly positive discretionary cash flows compared to various control groups. We also find that this real activities manipulation is detrimental to future performance.     

Goodwill — An Example of Puzzle-Solving in Accounting

The nature of goodwill continues to be misunderstood by most accountants and confusion surrounding the measurement and reporting of goodwill persists. The rejection of official accounting standards on goodwill is a common occurrence. A dynamic open system perspective is used in this paper to re-examine the nature of goodwill. It is found that a meaningful economic interpretation can be developed for internally generated goodwill but not for 'purchased goodwill'. There is an inability to identify the stream of benefits specifically associated with goodwill arising on acquisition.     

商誉减值测试中营运资金预测问题探讨

注册会计师年报审计时的一大难题——商誉减值测试,由于涉及管理层主观重大判断,测试涉及的参数较多,复杂程度较高。在预测未来现金流时,营运资金的预测对评估对象的价值影响很大,在现金流折现模型,营运资金的预测是重要的指标之一。对营运资金的预测方法较多,而且存在用营运资金预测来调节评估对象的评估值,存在较大的随意性,直接影响到商誉是否减值,及减值金额的大小。本文通过对运资金的分类对企业的各类营运资金进行预测,从而进一步测试出商誉是否减值。     

Is the Selection of the Amortization Period for Goodwill a Strategic Choice?

This study examines whether the choice of amortization life for purchased goodwill is predictive of the firm's post-acquisition earnings levels, given that shorter lives could lead to a dilution in earnings. Our findings support this interpretation. Further, consistent with Andrade (2001), we demonstrate a link between post-acquisition earnings changes and stock performance. These results suggest that the amortization life chosen is a reliable predictor of the success of the acquisition both in terms of earnings changes and future stock performance. These findings are relevant since the information concerning the life chosen was eliminated by the adoption of SFAS No. 142.