The value-relevance of goodwill reported under IFRS 3 versus IAS 22

Abstract

The application of International Financial Reporting Standard (IFRS) 3, which became compulsory for financial periods beginning on or after 31 March 2004, significantly changed the initial and subsequent measurement of goodwill in annual reports. This change in the accounting treatment of goodwill was not universally accepted and there has been ongoing debate around the efficacy of the new goodwill treatment. This study uses a revised Ohlson-type value-relevance model (Ohlson, 1995) to examine the association between the goodwill balance reported and the market value of a company before and after the introduction of IFRS 3. The findings show that the goodwill balance reported according to IFRS 3 provides information that is more value-relevant than the previous International Accounting Standard (IAS) 22 treatment. In the light of the ongoing debate around the accounting treatment of goodwill, this study provides regulators and researchers with valuable information to further assess the efficacy of the IFRS 3 goodwill treatment.

Keywords:

• Goodwill
• IFRS 3
• IAS 22
• Value-Relevance

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. Barth and Clinch (2009) investigate how effective different specifications are at mitigating for scale effects. They find that share-deflated and undeflated specifications generally mitigate the best for a variety of scale effects. They acknowledge that deflating by the number of outstanding shares might seem like an unlikely choice, since there is not necessarily a link between the number of shares outstanding and any economic phenomena, but nevertheless their findings indicate that some features of the number of outstanding shares do create a correlation between them and scale, resulting in more correct inferences when scaling data by the number of outstanding shares.