Goodwill Accounting Under the IFRS Impairment-only Approach? An Asia-Pacific Study
Nguyen, Canh Tien
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The purpose of this thesis is to examine how the International Financial Reporting Standards (IFRS)-based goodwill impairment approach is implemented, and to evaluate the role of national enforcement arrangements in this implementation. The sample for the study is drawn from a selection of Asia-Pacific countries that have a variety of institutional settings for enforcing accounting standards. In particular, this thesis has three separate but related empirical studies. The first study, entitled “Goodwill accounting with amortisation or with impairment?”, investigates the comparative value relevance to investors of goodwill measures. This study reports that goodwill information is more value-relevant in countries that have adopted the IFRS-based impairment approach than those that have not adopted the IFRS-based impairment approach. In addition, the study finds that the value relevance of goodwill numbers is greater in stronger enforcement countries than in weaker enforcement countries. The second study, entitled “Is goodwill impairment under IFRS timely?”, investigates the timeliness of goodwill impairments under the IFRS-based impairment approach. I find that goodwill impairment is associated with lagged market indicators and with both contemporaneous and lagged financial accounting indicators. This finding suggests that firms respond to poor economic performance, but not entirely on a timely basis. Alternatively, firms may engage in earnings management activities to manage accounting indicators so as to delay the goodwill write-offs. These findings hold up in countries with strong enforcement. In contrast, the likelihood of goodwill impairments by firms in countries with weak enforcement is solely attributable to lagged accounting indicators and “big-bath” incentives. In the third study, entitled “Do firms manipulate cash flows to delay goodwill impairment losses?”, I find that those firms that are vulnerable to recognition of impairment for two to three years but have not impaired their goodwill exhibit significantly higher abnormal cash flow levels relative to the impairing firms. Additionally, firms continue to implement cash flow management after the delay in goodwill impairment, even though their capacity to do so diminishes within two years. The sub-optimal operational decisions by non-impairers to delay goodwill impairment are found to be detrimental to their future performance. The degree of real activities engagement to manipulate cash flows and its unfavourable effect are higher in firms in stronger enforcement countries. The likely reason for this inconsistency is the risks of regulatory scrutiny created by the more stringent regulatory arrangement of accounting practices in these countries. Overall, this thesis documents that the benefits derived from the IFRS-based goodwill impairment approach have not yet been realised in countries with weak enforcement arrangements. The study also finds an unintended consequence of stronger enforcement is that it motivates cash flow manipulation, namely, firms resort to the more costly real operations to manipulate cash flows to provide stronger justification for the lack of impairments. The results are of potential interest to the standard setters and call for the attention of the enforcement bodies to improve the reporting regulations for financial reporting that limit different forms of accounting manipulation including real activities management.