Goodwill and Mandatory Disclosure Compliance: A Critical Review of the Literature

Abstract

The aim of this paper is to critically analyse the literature published from 2002 to mid‐2015 on disclosures of goodwill and their respective impairment tests; identify the main contributions of the literature, as well as its limitations; and suggest new approaches for future research. We also present a summary of the main determinants of disclosures on goodwill in the literature as well as the still scarce studies’ conclusions of those disclosures in the market. After a review of the literature, we discuss the need to reinforce enforcement mechanisms, so as to improve the level of compliance of disclosures on goodwill and their impairment tests. The majority of the analysed literature reveals that the information disclosed about goodwill is incomplete and largely heterogeneous, indicating a reduced level of compliance with the disclosures required by accounting standards. The paper may support the development of future empirical studies about goodwill's disclosures, which will bridge the identified gaps in the literature.

Introducing More IFRS Principles of Disclosure – Will the Poor Disclosers Improve?

“…A second one would be related to the determinants and the relevance of country-specific variables compared to company-specific ones. Adding to the conclusions of Carvalho et al (2016), our review points at enforcement characteristics, such as the strength of the enforcement process or the size of the national stock market, being positively associated with compliance together with high-quality auditing and corporate governance measures. At the company level, audit quality, goodwill positions and belonging to goodwill-intensive industries, prior experience with IFRS, the existence of ACs, the issuance of equity shares or bonds and ownership structure are found to be influential factors although the evidence found tend to be weaker than for countrylevel factors.…”

“…In a literature review by Carvalho, Rodrigues, and Ferreira (2016) of studies of goodwill and impairment test disclosures for the period 2002 to 2015, the authors state that there is a need for better enforcement mechanisms as a way to improve the level of compliance. They conclude that, based on their analysis of prior literature, information disclosed about goodwill is still incomplete and largely heterogeneous, indicating low levels of compliance.…”

Analyst Characteristics and the Level of Critical Perception of Goodwill Accounting

“…However, the practical application of these standards has raised concerns among accounting scholars as well as standard setters (see Carvalho et al. ). Recent literature has highlighted the perils associated with managerial discretion in the choice of inputs in impairment testing, which can result in the avoidance of goodwill write‐offs and in earnings management (e.g., Avallone and Quagli ; Carlin and Finch ; Ji ; Landsman ; Ramanna and Watts ).…”

Impairment Losses: The Impact of First‐time Adoption of the Accounting Standardisation System in Portugal

“…; Carlin and Finch ; Guthrie and Pang ; Kaiying ; Carvalho et al. ) with negative implications on the quality of information. Moreover, Carvalho et al.…”