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Does a goodwill impairment regime better reflect the underlying economic attributes of goodwill?


  • The authors gratefully acknowledge comments and suggestions from Donald Stokes, Peter Wells, David Lont, workshop participants at Monash University and participants at the 2008 University of New South Wales National Honours Colloquium, 2009 AAA Annual Meeting and 2009 AFAANZ Annual Conference. The authors also gratefully acknowledge the financial support of Monash University, the Australian Research Council and CPA Australia.


IFRS adoption transformed the accounting treatment for goodwill in many countries. Instead of amortizing goodwill, firms now test for its impairment and write off impairment losses against income. Accounting standard-setting bodies claim that an impairment regime better reflects the underlying economic value of goodwill than systematic amortization. We investigate this claim by comparing the association between goodwill accounting charges against income and firms’ economic investment opportunities in amortization and impairment regimes. We find that the association between firms’ goodwill charges against income and the firms’ investment opportunities is stronger during the IFRS regime than the AGAAP regime. This indicates that, as claimed, impairment charges better reflect the underlying economic attributes of goodwill than do amortization charges.