Goodwill impairment testing under IAS 36: study of EU area listed companies in 2006-2007

Abstract

Research Objective

The objective of the research is to find out how well EU area listed firms comply with the requirements of goodwill impairment testing mandated by the IFRS 3 and IAS 36 standards. More specifically, the hypothesized relationship between recorded goodwill impairment losses and future operational cash flows is being examined. An attempt is made to study how recorded goodwill impairment losses are linked to underlying economics.

Sample Data and Research Methods

Sample data consists of financial and earnings data for EU area listed companies during years 2006-2008. Sample data is gathered from Thomson One Banker Worldscope and Datastream databases. The utilized research methods are descriptive analysis and regression analysis.

Results

The results of the estimated regression model show that recorded goodwill impairment losses are not fully associated with underlying economics. Weak evidence was found suggesting that EU area firms might be managing fair value estimates when conducting goodwill impairment testing. Possible explanations for the missing association between recorded goodwill impairment losses and underlying economics are untimely recording of goodwill impairment losses, challenges in impairment testing due to global financial crisis and earnings management.

Following possible motives are identified for managing fair value estimates when conducting goodwill impairment testing: income smoothing, big bath –theory, signaling effect, meeting the covenant requirements, utilizing tax shield and unrealized expected synergy benefits.