The authors are grateful for helpful comments received at the 2009 British Accounting Association Conference, University of Dundee.
Accounting Discretion in Goodwill Impairments: UK Evidence
Article first published online: 13 SEP 2011
© 2011 Blackwell Publishing Ltd.
Journal of International Financial Management & Accounting
Volume 22, Issue 3, pages 165–204, Autumn 2011
How to Cite
AbuGhazaleh, N. M., Al-Hares, O. M. and Roberts, C. (2011), Accounting Discretion in Goodwill Impairments: UK Evidence. Journal of International Financial Management & Accounting, 22: 165–204. doi: 10.1111/j.1467-646X.2011.01049.x
- Issue published online: 13 SEP 2011
- Article first published online: 13 SEP 2011
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.