Goodwill accounting in the UK

Kirkham, Linda; Arnold, John

doi:10.1080/09638189200000032

Cited by 3 publications

(1 citation statement)

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“…However, acquired goodwill is a consequence of an economic transaction, and therefore, it cannot be ignored. Research suggests that while the level of goodwill explains differences in value across firms (Jennings et al, 1996), goodwill amortizations is less useful information to investors (Kirkham and Arnold, 1992;Jennings et al, 2001;Moehrle et al, 2001). But in the US, where much of this research is conducted, goodwill amortization expenses were rarely disclosed, and hence there is little research testing the relevance of goodwill amortizations.…”

Section: Effects Of the Adoption On Financial Statementsmentioning

confidence: 92%

The Adoption of IFRS 3: The Effects of Managerial Discretion and Stock Market Reactions

Hamberg

Paananen

Novák

2011

European Accounting Review

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In recent years, several accounting standards, including IFRS 3, issued by the IASB, substitute historical cost with fair value measures and so provide managers with increased discretion to determine fair value without an actual market for the asset. Using Swedish data, we document the accounting consequences of the adoption of IFRS 3 and the stock market's reaction. After the adoption of this standard in January 2005 the amount of capitalized goodwill increased substantially. Goodwill impairments under IFRS are considerably lower than goodwill amortizations and impairments made under Swedish GAAP. Consequently, the adoption of IFRS 3 increased reported earnings. An analysis of economic incentives influencing the impairment decision at the initial adoption of IFRS 3 shows that tenured management is negatively associated with the impairment decision. However, most firms did not reclassify goodwill or make additional impairments. Firms with substantial amounts of goodwill yielded abnormally high returns despite abnormally low earnings. Investors seem to, correctly or incorrectly, have viewed the accrual-based increase in earnings stemming from IFRS 3 as an indication of higher future cash flows.

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