Insights on CFOs’ Perceptions about Impairment Testing Under IAS 36

Abstract

We survey CFOs of Italian listed companies and examine their views on the complexities involved in implementing IAS 36 requirements and the perceived usefulness of national guidelines aiming at assisting preparers in this respect. We find that IAS 36 is perceived as an atypical standard among IFRS, it demands subjective interpretation, its requirements can be made adaptable to managerial needs and do not limit creative accounting. Further, respondents do not see a strong link between IAS 36 disclosure requirements and market variables, except for stock returns. Moreover, the impairment testing process became more difficult during the recent financial crisis and guidelines issued by the Italian authorities do not appear to assist in implementing the recoverable amount estimation process or compliance with mandatory disclosure. The respondents explicitly call for a revision in IAS 36 and/or issuance of separate guidance. These findings inter alia respond directly to the IASB’s current quest on financial statements preparers’ concerns about the application of the IAS 36 requirements.

Keywords:

• IFRS
• IAS 36
• Italy
• survey
• CFO

Acknowledgements

We gratefully acknowledge helpful comments received from the Editor (Paul André), three anonymous reviewers, Dionysia Dionysiou, Giulia Leoni, Pietro Mazzola, Julia Mundy, Alberto Quagli, and the participants of the AIDEA Bicentenary Conference (Lecce, September 2013). We also gratefully acknowledge support from Associazione Nazionale Direttori Amministrativi e Finanziari (ANDAF) in piloting the survey. Francesco Mazzi and Giovanni Liberatore also gratefully ackowledge Ordine Dottori Commercialisti ed Esperti Contabili (ODCEC) of Florence and Fondazione Dottori Commercialisti ed Esperti Contabili (FDCEC) of Florence for funding this study. This paper is the winner of the 2013 AIDEA Best Paper Award.

Disclosure Statement

No potential conflict of interest was reported by the authors.

Notes

1 Throughout the study, by PIR we mean the Report and Feedback Statement describing the IASB Post-Implementation Review of IFRS 3 Business Combinations.

2 See also Schatt, Doukakis, Bessieux-Ollier, Walliser, and Morricone (2016), in this issue, for a review of the European literature.

3 FASB: http://www.fasb.org/jsp/FASB/FASBContent_C/ProjectUpdatePage&cid=1176163679475#;EFRAG: http://www.efrag.org/Front/p261-1-272/Proactive---Goodwill-impairment-and-amortisation.aspx.

4 See Husmann and Schmidt (2008, 2011) and Kvaal (2010) for an in depth and critical discussion about the guidance provided by IAS 36 on the discount rates to be used in the impairment testing process.

5 By Italian GAAP, we mean the accounting rules contained in the Italian Civil Code (i.e. code law) and the accounting principles, pronouncement, non-promulgated guidance or practices, issued by the OIC (Organismo Italiano di Contabilità) (i.e. the National Standard Setter). The latter are given a subservient, integrative and interpretative role to the former (Fox, Gwen, Helliar, & Veneziani, 2013).

6 Absence is defined as ‘the extent to which the rules regarding certain accounting issues covered by IAS are missing in the Italian accounting standards’ (Marra et al., 2011, p. 210). Divergence is defined as ‘the extent to which the Italian standards and IAS/IFRS differ with respect to measurement and reporting rules that apply to the same accounting items’ (Marra et al., 2011, p. 210).

7 Given these substantial differences between Italian GAAP and IFRS, many studies have examined the effect of the mandatory adoption of IFRS by Italian listed firms (e.g. Cordazzo, 2013; Fox et al., 2013; Moscariello, Skerratt, & Pizzo, 2014) although not focusing on IAS 36.

8 The Banca d’Italia is the Italian Central Bank. The CONSOB is the Commissione Nazionale per le Società e la Borsa, the Italian securities and markets authority. The ISVAP is the Istituto per la Vigilanza sulle Assicurazioni Private, the Italian insurance private contracts authority.

9 The OIC is the Organismo Italiano di Contabilità, the National Standard Setter.

10 The OIV is the Organismo Italiano di Valutazione, the national valuation professional body.

11 We provide further details on the contents of these two guidelines, along with other non-Italian guidelines on the subject, in Section 4.5 while reflecting on our findings.

12 As discussed in the Introduction and in Section 2.2, Petersen and Plenborg (2010) surveyed preparers from Danish firms on how they implement goodwill impairment tests. However, our study differs in two ways. First, Petersen and Plenborg (2010) do not ask for preparers’ views on IAS 36. Instead, they collect technical information necessary in implementing the impairment tests (e.g., CGUs identified, discount rates applied, etc.). Then, they compare the responses obtained with the Standard and they identify complexities in implementing IAS 36 and key critical areas. On the contrary, we directly ask preparers’ views on some critical matters, allowing them to scale their opinion from 1 to 5. Second, the Italian and Danish environments differ in many respects. For example, Italy is a country with more perceived corruption than Denmark (Transparency International, http://www.transparency.org/cpi2014/results). Additionally, Denmark is a country in which there is less divergence between IFRS and national GAAP (Ding et al., 2007). Finally, Denmark is a country with higher market development (World Bank, http://data.worldbank.org/indicator/CM.MKT.LCAP.GD.ZS), anti-self-dealing (Djankov et al., 2006), and lower earnings management (Leuz et al., 2003).

13 A test can be said to have face validity if it appears it is going to measure what it is supposed to measure. Face validity is commonly assessed by a review of the survey items by untrained judges. Content validity refers to the extent to which a measure represents all facets of a given topic. Content validity is commonly assessed by the use of recognised subject matter experts who ensure that a survey contains everything it should and doesn’t include anything that it shouldn’t.

14 A copy of our instrument is available upon request. We acknowledge that the statements translated in English for presentation and discussion herein may suffer from some terminology non-equivalence across the two languages (c.f., Baskerville & Evans, 2011). Nevertheless, every effort is made to ensure that every word’s/statement’s meaning is as close as possible to the corresponding ones in Italian.

15 A test can be said to be reliable depending on how well or poorly it performs in a given population. Test-retest reliability is the most commonly used indicator of survey instrument reliability (Litwin, 1995). The retest reliability tests are based on Kendall’s Tau (i.e. rank correlation coefficient intended for use on small- and moderate-sized datasets). Both the retest data and reliability results are available upon request.

16 Each of the subsections below is entitled with the corresponding title of each category/theme in the questionnaire. The objective is the discussion of the findings to flow along with the structure of the questionnaire.

17 We perform a factor analysis, relying on Kaiser’s criterion (1960) of retaining all factors with eigenvalues greater than 1. We then improve the factors’ interpretation through varimax orthogonal rotation (see Field, 2009). Before interpreting the results of the factor analysis, we perform two preliminary tests to ensure that our results are not biased. Given that factor analysis relies on sample size, we note that the Kaiser–Meyer–Olkin test proves that our sample is adequate for performing a factor analysis on 12 items (those related to IAS 36) ( is acceptable according to Kaiser (1974)). Moreover, correlation among variables is also a crucial factor when performing factor analysis (i.e. low correlations lead to poor results). Bartlett’s test of sphericity () indicates that the correlation between items is sufficiently large for factor analysis.

18 We did not specify the beginning of the financial crisis, which impacted industries at various points in time.