Accounting discretion in goodwill impairments

UK evidence

Clare Roberts, Naser AbuGhazaleh, Osama al Hares

Research output: Contribution to journalArticle

32 Citations (Scopus)

Abstract

This study examines managers’ use of discretion in determining goodwill impairment losses following the mandatory adoption of IFRS 3 “Business Combinations,” and whether this discretion reflects opportunistic reporting by managers or the provision of their private information. Although IFRS 3 was issued to improve the accounting treatment for goodwill and provide users with more useful and value-relevant information regarding the underlying economic value of goodwill, it has been criticized on the grounds of the managerial discretion inherent in impairment testing. Therefore, ex-ante, it is unclear how the
impairment-only approach has affected the reporting of goodwill impairment losses. After controlling for economic factors, empirical results reveal that managers are exercising discretion in the reporting of goodwill impairments following the adoption of IFRS 3. Specifically, goodwill impairments are more likely to be associated with recent CEO changes, income smoothing and “big bath” reporting behaviors. However, the results also indicate that goodwill impairments are strongly associated with effective governance mechanisms suggesting that managers are more likely to be exercising their accounting discretion to convey their private information about the underlying performance of the firm rather than acting opportunistically. These inferences are robust to various modeling specifications and variable definitions, suggesting that IFRS 3 has provided managers with a framework to reliably convey their private information about future cash flows consistent with the IASB’s objectives in developing the impairment standard.
Original languageEnglish
Pages (from-to)165-204
Number of pages40
JournalJournal of International Financial Management & Accounting
Volume22
Issue number3
Early online date13 Nov 2011
DOIs
Publication statusPublished - 2011

Fingerprint

Impairment
Accounting discretion
Goodwill
Managers
International Financial Reporting Standards
Discretion
Private information
Economic factors
Economic value
Inference
Empirical results
Testing
Governance mechanisms
Income smoothing
Business combinations
Managerial discretion
Modeling
Chief executive officer
International Accounting Standards Board
Cash flow

Cite this

Accounting discretion in goodwill impairments : UK evidence. / Roberts, Clare; AbuGhazaleh, Naser ; al Hares, Osama.

In: Journal of International Financial Management & Accounting , Vol. 22, No. 3, 2011, p. 165-204.

Research output: Contribution to journalArticle

Roberts, Clare ; AbuGhazaleh, Naser ; al Hares, Osama. / Accounting discretion in goodwill impairments : UK evidence. In: Journal of International Financial Management & Accounting . 2011 ; Vol. 22, No. 3. pp. 165-204.
@article{b8660d51cdbf484d97427bd775b8a183,
title = "Accounting discretion in goodwill impairments: UK evidence",
abstract = "This study examines managers’ use of discretion in determining goodwill impairment losses following the mandatory adoption of IFRS 3 “Business Combinations,” and whether this discretion reflects opportunistic reporting by managers or the provision of their private information. Although IFRS 3 was issued to improve the accounting treatment for goodwill and provide users with more useful and value-relevant information regarding the underlying economic value of goodwill, it has been criticized on the grounds of the managerial discretion inherent in impairment testing. Therefore, ex-ante, it is unclear how theimpairment-only approach has affected the reporting of goodwill impairment losses. After controlling for economic factors, empirical results reveal that managers are exercising discretion in the reporting of goodwill impairments following the adoption of IFRS 3. Specifically, goodwill impairments are more likely to be associated with recent CEO changes, income smoothing and “big bath” reporting behaviors. However, the results also indicate that goodwill impairments are strongly associated with effective governance mechanisms suggesting that managers are more likely to be exercising their accounting discretion to convey their private information about the underlying performance of the firm rather than acting opportunistically. These inferences are robust to various modeling specifications and variable definitions, suggesting that IFRS 3 has provided managers with a framework to reliably convey their private information about future cash flows consistent with the IASB’s objectives in developing the impairment standard.",
author = "Clare Roberts and Naser AbuGhazaleh and {al Hares}, Osama",
year = "2011",
doi = "10.1111/j.1467-646X.2011.01049.x",
language = "English",
volume = "22",
pages = "165--204",
journal = "Journal of International Financial Management & Accounting",
issn = "0954-1314",
publisher = "Wiley-Blackwell",
number = "3",

}

TY - JOUR

T1 - Accounting discretion in goodwill impairments

T2 - UK evidence

AU - Roberts, Clare

AU - AbuGhazaleh, Naser

AU - al Hares, Osama

PY - 2011

Y1 - 2011

N2 - This study examines managers’ use of discretion in determining goodwill impairment losses following the mandatory adoption of IFRS 3 “Business Combinations,” and whether this discretion reflects opportunistic reporting by managers or the provision of their private information. Although IFRS 3 was issued to improve the accounting treatment for goodwill and provide users with more useful and value-relevant information regarding the underlying economic value of goodwill, it has been criticized on the grounds of the managerial discretion inherent in impairment testing. Therefore, ex-ante, it is unclear how theimpairment-only approach has affected the reporting of goodwill impairment losses. After controlling for economic factors, empirical results reveal that managers are exercising discretion in the reporting of goodwill impairments following the adoption of IFRS 3. Specifically, goodwill impairments are more likely to be associated with recent CEO changes, income smoothing and “big bath” reporting behaviors. However, the results also indicate that goodwill impairments are strongly associated with effective governance mechanisms suggesting that managers are more likely to be exercising their accounting discretion to convey their private information about the underlying performance of the firm rather than acting opportunistically. These inferences are robust to various modeling specifications and variable definitions, suggesting that IFRS 3 has provided managers with a framework to reliably convey their private information about future cash flows consistent with the IASB’s objectives in developing the impairment standard.

AB - This study examines managers’ use of discretion in determining goodwill impairment losses following the mandatory adoption of IFRS 3 “Business Combinations,” and whether this discretion reflects opportunistic reporting by managers or the provision of their private information. Although IFRS 3 was issued to improve the accounting treatment for goodwill and provide users with more useful and value-relevant information regarding the underlying economic value of goodwill, it has been criticized on the grounds of the managerial discretion inherent in impairment testing. Therefore, ex-ante, it is unclear how theimpairment-only approach has affected the reporting of goodwill impairment losses. After controlling for economic factors, empirical results reveal that managers are exercising discretion in the reporting of goodwill impairments following the adoption of IFRS 3. Specifically, goodwill impairments are more likely to be associated with recent CEO changes, income smoothing and “big bath” reporting behaviors. However, the results also indicate that goodwill impairments are strongly associated with effective governance mechanisms suggesting that managers are more likely to be exercising their accounting discretion to convey their private information about the underlying performance of the firm rather than acting opportunistically. These inferences are robust to various modeling specifications and variable definitions, suggesting that IFRS 3 has provided managers with a framework to reliably convey their private information about future cash flows consistent with the IASB’s objectives in developing the impairment standard.

U2 - 10.1111/j.1467-646X.2011.01049.x

DO - 10.1111/j.1467-646X.2011.01049.x

M3 - Article

VL - 22

SP - 165

EP - 204

JO - Journal of International Financial Management & Accounting

JF - Journal of International Financial Management & Accounting

SN - 0954-1314

IS - 3

ER -