Compliance with goodwill impairment disclosure and reasons provided by management: Evidence from South Africa

Abstract

Purpose: The aim of this article is to investigate compliance with the IFRS disclosure requirements regarding goodwill impairment testing in the South African setting, using JSE-listed firms as a sample. The article considers the explanatory strategies used by management to provide reasons for goodwill impairment.

Motivation: Goodwill and its impairment are continually debated in accounting because of the nature of this intangible asset, and changes in the accounting standards regarding disclosure of goodwill and goodwill impairment.

Design/Methodology/Approach: Panel least squares regressions and a cluster analysis were used to analyse JSE-listed firms for the period from 2006 to 2017.

Main findings: The findings show that firms with material goodwill balances and an independent audit committee are associated with higher compliance with goodwill impairment disclosure. Firms that provided an excuse for impairing goodwill without taking responsibility for that impairment tended to have higher compliance regarding goodwill impairment disclosure than firms that did not provide any reason for goodwill impairment at all.

Practical implications/Managerial impact: Managers exhibiting compliance with goodwill impairment disclosure standards are inclined to furnish more comprehensive elucidation regarding the underlying reasons for the initiation of goodwill impairment. Investors, in turn, might find it useful to study and question the reasons provided as part of the goodwill impairment disclosure recognizing its potential significance in their decision-making processes.

Novelty/Contribution: The findings of the study provide evidence that aids understanding of goodwill impairments and the compliance with its disclosures, thereby enhancing knowledge of the effectiveness of the implementation of IFRS 3.

Keywords:

• goodwill impairment disclosure
• goodwill impairment disclosure compliance
• reasons for goodwill impairments
• IFRS 3
• IAS 36

Disclosure statement

No potential conflict of interest was reported by the authors.