The impact of IAS 36 on goodwill disclosure: Evidence of the write-offs and performance effects

Abstract

<p><strong>Purpose: </strong>This paper aims at examining the quality of corporate disclosure about goodwill impairment and its relationship with goodwill write-offs and earnings performance, exploiting an accounting regulation that allows significant unverifiable estimates whilst requires a high level of information.</p><p><strong>Design/methodology/approach: </strong>This study, based on a sample of Italian and British firms with market indications of goodwill impairment, verifies through a both univariate and multivariate analysis whether the level of disclosure is positively related to the magnitude of goodwill write-off and to earnings performance, using a self-constructed score of mandatory disclosure about goodwill impairment tests in accordance with IAS 36 requirements.</p><p><strong>Findings: </strong>In a general context of insufficient information, we find that for Italian firms both the magnitude of goodwill write-offs and earnings performance are significantly and positively associated to the level of mandatory disclosure about goodwill impairment tests. For the British firms, as companies more used to impairment test rules, the data does not confirm any significant association.</p><p><strong>Research limitations/implications: </strong>The objective of this study is to test the initial impact of IAS 36 in the first years of its application, selecting a sample of firms belonging to limited but significant activity sectors. Future research could usefully analyse a wider sample of firms, also extending the time period of analysis. In any case, the findings of our study are consistent with the insights of earnings management theory, suggesting that the subjectivity inherent in impairment test assumptions could be used opportunistically by managers.</p><p><strong>Originality/value: </strong>This research investigates questions still relatively unexplored, concerning the effects of goodwill write-offs and accounting performance on corporate disclosure about goodwill impairment test. Based on this analysis, the study shows that corporate disclosure could be a “litmus paper” able to test the degree of good faith with which each firm has implemented IAS 36 requirements.</p

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

“…We found that studies that analysed the determinants of the goodwill disclosures and/or the respective impairment tests are few and very recent (see Paananen ; Chen et al. ; Devalle and Rizzato ; D'Alauro ; Fernandes et al. ; Glaum et al.…”

“…Studies using the construction of disclosure index to quantify the level of compliance with disclosure requirements for impairment tests on goodwill are still relatively recent. In general, the tendency is to use unweighted indices (see, for example, Paananen ; Chen and Gu ; Biancone ; Devalle and Rizzato , ; D'Alauro ; Bepari et al. ), which assume that each requirement has the same relevance for the information user.…”

“…Thus, focusing on just one year there are studies from Devalle and Rizzato () (data from 2010 from companies with securities listed in Italy, France, Germany and Spain) and Paananen () (data from 2005 from companies with values quoted in France, Germany and the UK). The only study that analysed the evolution of disclosure compliance of the impairment tests for two or more periods is that of D'Alauro (), which used a sample of Italian and British companies for the period 2006–2008.…”

“…Despite the unsatisfactory level of compliance with disclosure requirements of the impairment tests of goodwill, the reported trend has improved over time (Biancone ; D'Alauro ). For example, Bepari et al.…”

“…Studies using the construction of disclosure index to quantify the level of compliance with disclosure requirements for impairment tests on goodwill are still relatively recent. In general, the tendency is to use unweighted indices (see, for example, Paananen 2009; Chen and Gu 2011; Biancone 2012; Rizzato 2012, 2013;D'Alauro 2013;Bepari et al 2014), which assume that each requirement has the same relevance for the information user. Only in Finch et al (2013) and Khairi et al (2012) were weighted indices used to measure level of compliance with the disclosure of the impairment tests on goodwill, differentiating the importance of each item in the calculation of the respective index.…”