Goodwill under IFRS: Relevance and disclosures in an unfavorable environment

Abstract

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.

Abbreviations:

• ASE
• Athens Stock Exchange
• FVA
• fair value accounting
• IFRS
• International Financial Reporting Standards
• OLS
• ordinary least squares

• Goodwill
• Value relevance
• Fair value accounting
• Mandatory disclosures
• IFRS
• Greece

Acknowledgments

We would like to thank an anonymous reviewer and Glen Lehman (the editor) for valuable suggestions and comments. Earlier versions of this study have been benefited by participants’ comments in the 14th Annual Conference of the Financial Accounting and Reporting Special Interest Unit of the British Accounting Association in Bristol, UK, in the 2010 Nordic Accounting Conference in Copenhagen, Denmark and in a research seminar at Åbo Akademi University, Finland, invited by Professor Lars Hassel.

Notes

2 In 2001, the Committee of European Securities Regulators (CESR) was established as an independent committee of European Securities regulators. In the beginning of 2011, CESR was replaced by the European Securities and Markets Authority (ESMA), which is part of the European System of Financial Supervision.

3 Observations with Cook's distance statistic greater than 4/n, where n is the number of observations.

4 As discussed in the next section, the sample is comprised of companies found to have purchased goodwill recognized in their 2008 annual reports. It should be mentioned that in 2008, none of these companies voluntarily adopted the then-new amendments of the standards mandated by January 1st, 2009. Thus, the same requirements apply to all companies.

5 Greek accounting regulation dictates that companies’ fiscal years shall end on either December 31st or June 30th, whereas in practice, almost all companies listed on the ASE have fiscal year-ends on December 31st. Because the dependent variable of the empirical models employed is the market value of equity four months after the company's fiscal year-end, the sample companies must be active on April 30th to be included.

6 Observations with Cook's distance greater than 4/n, where n is the number of observations, are excluded.

7 A non-parametric test is chosen due to data deviation from normality.

8 A non-parametric test is chosen due to data deviation from normality.

9 The remaining companies in the sub-sample under examination have a goodwill-to-total-assets ratio of at least 1%.