Regime change in the accounting for goodwill. Goodwill write-offs and the value relevance of older goodwill

• Pages: 43-69
• Published date: 06 March 2017
• Date: 06 March 2017
• DOI: https://doi.org/10.1108/IJAIM-02-2016-0018
• Author: Md Khokan Bepari,Abu Taher Mollik

Regime change in the accounting

for goodwill

Goodwill write-offs and the value relevance of

older goodwill

Md Khokan Bepari

Holmes Institute, Brisbane, Australia, and

Abu Taher Mollik

School of Information Systems and Accounting, The University of Canberra,

Canberra, Australia

Abstract

Purpose –This study aims to examine the impact of the recent regime change in accounting for goodwill,

from the systematic periodic amortisation to the impairment testing, on the frequency and the extent of

goodwill write-offs in the context of Australia. It also examines the impact of the change from the amortisation

approach to the impairment approach on the value relevance of older goodwill.

Design/methodology/approach –The authors approach the rst research question by comparing the

actual amount of goodwill impairment charge by the sample rms with the minimum “as if” amortisation

charge that would have been required under the amortisation regime. The authors approach the second

question using a modied Ohlson model (1995), similar to Bugeja and Gallery (2006). The sample consists of

911 rm-year observations with the number of observations in the particular year being 238, 242, 220 and 211

in 2009, 2008, 2007 and 2006, respectively.

Findings –The ndings suggest that the adoption of the impairment approach has decreased the frequency

and the amount of goodwill write-off. The goodwill impairment amount is substantially less than the “as if”

amortisation amount that would have been required under the amortisation regime. The results also suggest

that older goodwill is now value-relevant, whereas goodwill purchased during the current year is not

value-relevant. One reason for this may be that AASB 3: Business Combination allows for the provisional

allocation of the purchase price to goodwill to be allocated to other identiable intangible assets latter on.

Hence, during the year of business combination, investors do not form a rm view of the amount of goodwill

arising out of the business combination.

Research limitations/implications –This study uses data for the rst four years since the inception of

the impairment approach.

Practical implications –The ndings of this study have important implications for the fair value

accounting debate. The discretions allowed the managers under the impairment approach to improve the

information content of goodwill. The relatively low levels of goodwill impairment even during the

2008-2009 global nancial crisis contradict to the apprehensions found in the literature that managers

will use the goodwill write-off as a tool for downward earnings management. The ndings also imply that

if managers are allowed with adequate exibility through accounting standards rather than stipulating

some systematic and mechanistic rules, the information value of the accounting measurement may

improve.

Social implications –The ndings feed into the debate of “rule-based” versus “principle-based”

accounting standards and favours the “principle-based” accounting standards. The ndings also

contribute to the accounting measurement literature by concluding that if allowed with discretionary

choices, managers may not always opt for the conservative accounting measurements (such as, recording

goodwill write-offs).

Originality/value –Adopting an alternative approach, this study shows that the fair value accounting

for goodwill has resulted in an optimistic approach to goodwill write-offs. It has also improved the

The current issue and full text archive of this journal is available on Emerald Insight at:

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Accounting

for goodwill

43

Received 25 February 2016

Revised 21 August 2016

Accepted 21 August 2016

InternationalJournal of

Accounting& Information

Management

Vol.25 No. 1, 2017

pp.43-69

©Emerald Publishing Limited

1834-7649

DOI 10.1108/IJAIM-02-2016-0018

information content of reported goodwill. This is the rst known study addressing the research questions

in consideration after the adoption of the goodwill impairment approach.

Keywords Discretionary accounting measurement, Goodwill impairment, IFRS/AASB136,

Value relevance of goodwill

Paper type Research paper

1. Introduction

This study investigates two inter-related research questions. Firstly, how the adoption of the

impairment approach has changed the frequency and the quantity of goodwill write-offs

compared with the systematic goodwill amortisation. Secondly, this study revisits the

question posed by Bugeja and Gallery (2006) on whether the value relevance of goodwill

differs across the ages of goodwill.

We examine the research questions in the context of Australia. In Australia, accounting

for goodwill has been changed by the introduction of Australian Accounting Standards

Board Standard (AASB) 3/International Financial Reporting Standard (IFRS) 3: Business

Combination and AASB 136/IFRS 36: Impairment of Assets starting from 1 January 2015.

Because of the involvement of a number of technical issues, the impairment approach (IFRS

36/AASB 136) is open to the application of managerial discretions for its practical

implementation. Watts (2003) characterises the move towards the impairment approach as

an error in the regulatory judgement that is likely to motivate managerial opportunism and

earnings management. Consistent with the concern raised by Watts (2003), empirical studies

provide evidence of earnings management through goodwill impairment amounts and

timing (Ramanna and Watts, 2010;Zhang and Zhang, 2007;Beatty and Weber, 2006). Zhang

(2008) posits that the management discretion is one reason why the goodwill impairment

testing (GIT) may not be successful in providing useful information. On the contrary,

Colquitt and Wilson (2002) and Donnelly and Keys (2002) argue that the adoption of the

fair-value-based goodwill impairment approach has been motivated by the conjecture that

the impairment approach will enable managers to provide information regarding goodwill

that is value-relevant to the market.

Literature has examined the value relevance and the information content of goodwill

impairment in different jurisdictions such as the USA, UK and other markets after the

introduction of the impairment approach (Beatty and Weber, 2006;Bens et al., 2011;Iatridis

et al., 2006;Li et al., 2010;Jarva, 2009;Ramanna and Watts, 2010;Lapointe-Antunes et al.,

2009). No study has examined these questions after the introduction of the impairment

regime. The choice of Australia is opportunistic because of the availability of data to the

authors. Nevertheless, the ndings are pertinent to other economies because of the

worldwide harmonisation of the accounting for goodwill. Moreover, relatively little evidence

exists in the context of Australia in these regards.

Examining a sample of the US rms, Li and Sloan (2017) suggest that the impairment

approach has resulted in inated goodwill balances and untimely goodwill impairments and

has increased the earnings volatility. They also suggest that the goodwill impairment is not

timely and lags deterioration of the operating performance. In the US context, Hayn and

Hughes (2006) also nd that the goodwill write-off lags behind the economic impairment of

goodwill. The low level of goodwill impairment charge implies that goodwill balances will

accumulate on the books indenitely. Hayn and Hughes (2006) argue that in the absence of

goodwill impairment recognitions, it will be difcult for nancial statement users to

determine the true value of goodwill. They further argue that the delay in the goodwill

write-offs will adversely affect the credibility of the carrying value of goodwill and the

credibility of the nancial statement for rms having goodwill as a substantial asset. Apart

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