Do Goodwill Impairments by European Firms Provide Useful Information to Investors?

Abstract

In 2004, the IASB adopted the mandatory annual impairment-test-only of goodwill (IAS 36) instead of amortization of goodwill. We present and discuss the academic literature regarding the association between the goodwill impairment, under this new standard, and the revision of investors’ expectations about a company’s future cash flows. The academic literature highlights that, in some specific cases, IAS 36 may help investors to revise their expectations. More precisely, goodwill impairment seems relevant when: (a) there is strong asymmetry of information between managers and investors, (b) managers disclose detailed information in the notes regarding their own assumptions about future cash flows, and (c) managers do not manage earnings and provide reliable information to investors. In many cases, goodwill impairment is probably useless for investors because they are able to revise their expectations based on public information, or because they cannot trust the accounting numbers and additional information in the notes about the impairment test, which are provided by (undisciplined) managers. More research is, however, needed to understand in which circumstances impairment-test-only is more useful, as well in which cases it is less adequate. Our analysis relates to the current post-implementation review and should be useful to standard-setters. Before any modification, we argue that standard-setters should carefully consider the economic and the institutional contexts when issuing a new accounting standard.

Keywords:

• goodwill impairment
• IAS 36
• IFRS 3
• Europe

Acknowledgements

We are grateful to participants at the EAA conference in Maastricht, an anonymous referee and, particularly, the editor Paul André and Serena Morricone for their helpful comments and suggestions.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1 IAS 36 is closely related to IFRS 3 ‘Business Combinations’, which was designed ‘to enhance the relevance, reliability and comparability of the information that an entity provides in its financial statements about a business combination and its effects’ (IFRS 3, A129). Ding, Richard, and Stolowy (2008) provide an interesting overview of the various phases of goodwill accounting over the last decades across different countries. Boennen and Glaum (2014) summarize the literature about goodwill accounting under SFAS 142 and IAS 36. D’Arcy and Tarca (2016) provide important implications and methodological suggestions for future goodwill accounting research. Finally, Wen and Moehrle (2015) summarize the US literature (SFAS 142). Our paper complements these papers, but we voluntarily limit ourselves mostly to European evidence regarding IAS 36 in this Special Issue of Accounting in Europe.

2 The theoretical literature on accounting for goodwill is scarce (for instance, see Johansson, Hjelström, & Hellman, 2016). The discussion of this literature is beyond the scope of this study.

3 Different opinions have been expressed about these discount rates. For a detailed discussion, see Husmann and Schmidt (2008) and Kvaal (2010).

4 Ramanna (2008) discusses the political reasons behind the adoption of this standard in the US.

5 Such an argument was, for instance, put forward by some respondents to PIR IFRS 8 – Segment information (IFRS, 2013).

6 For those companies, the total amount of goodwill recognized in the balance sheet is close to €800 billion. About 5% (€40bn) of that amount is recognized as impairment losses in 2011, given that significant impairment losses were limited to a handful of issuers, mostly in the financial services (€19.2bn) and telecommunication industry (€9.7bn).

7 More details about the role of auditors in the specific case of goodwill impairments can be found in Pajunen and Saastamoinen (2013), and Van de Poel et al. (2009). We discuss the role of auditors in Section 6 of our paper.