This study investigates the prevalence of transactions resulting in negative goodwill under IFRS 3 Business Combinations. For a sample of 1,440 firm-year observations of listed German firms for the years 2005 to 2013, we find 96 negative goodwill transactions which give rise to an immediate gain recognized by the acquirer. Besides the fact that “bargain purchases” are not as rare as assumed by the standard setter when developing the current guidance, we document the reasons for the occurrence of negative goodwill. Our findings show that “bargain purchases” indeed account for the single most disclosed reason in our sample. However, alternative reasons such as future restructuring activities or market conditions are together equally likely to explain the existence of negative goodwill. Therefore, our results question whether the current treatment of negative goodwill as an immediate gain is most appropriate.
TCC AG is a fast-growing bicycle production company and is headed by an ambitious top management team that wants to reinforce the firm’s expansion strategy with a sophisticated financial funding scheme. However, combined with an income decline, the financing strategy unexpectedly poses an existential threat to TCC. Complex accounting questions arise including the likely breach of a financial covenant, the detailed contractual clauses of a prospectus and the execution of a debt-for-equity swap. The underlying accounting requirements cover the recognition, the measurement and the disclosures of non-derivative financial instruments according to the International Financial Reporting Standards (IFRS). To foster a holistic understanding of financial instruments, the educational resource further combines the accounting concepts with related corporate finance theory. With this integrative approach, the case intends to encourage students’ critical reflection upon the far-reaching economic consequences resulting from accounting decisions.
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