Determinants of goodwill impairment

Ing. Arabela Sarkic

Master's thesis

Abstract:

The accounting for goodwill has been the topic of interest of many scholars and the accounting profession. Due to its nature, it is susceptible to a wide range of interpretations and changes in its recognition and treatment. Even after consolidated accounts of publicly traded companies in the European Union, were required from 2005, to prepare their financial statements according to International Accounting Standards, which in the case of goodwill and goodwill impairment are standards IFRS3 and IAS 36, the accounting literature expects that the recognition, treatment and disclosure of goodwill impairment loss, are influenced by factors & incentives, other than the underlying economics of the asset. This thesis presents a systematic overview of literature on the topic of determinants of goodwill impairment, and through a study, investigates the proposed associations between goodwill impairment and proxies for economic impairment, earnings management, reputation motives, and conservatism. The study was performed using tobit and logit regressions and included data on 165 publicly listed companies from UK, Germany and Spain, covering a period between 2014 and 2019, with a total of 923 firm-year observations. Goodwill impairment loss and the probability of its recognition, were found to be significantly associated to proxies of economic impairment and a recent change in senior management, while earnings management incentives were found not to have a significant role in accounting for impairment losses in goodwill, except for in the sample of companies from Spain. Conservatism, observed through uncertainty avoidance, was found significant in relation to goodwill impairment loss amount. This thesis contributes to current literature, by having investigated the importance of hypothesized determinants of goodwill impairment, for the most recent observable period, using a multi-country sample.

Abstract:

The accounting for goodwill has been the topic of interest of many scholars and the accounting profession. Due to its nature, it is susceptible to a wide range of interpretations and changes in its recognition and treatment. Even after consolidated accounts of publicly traded companies in the European Union, were required from 2005, to prepare their financial statements according to International Accounting Standards, which in the case of goodwill and goodwill impairment are standards IFRS3 and IAS 36, the accounting literature expects that the recognition, treatment and disclosure of goodwill impairment loss, are influenced by factors & incentives, other than the underlying economics of the asset. This thesis presents a systematic overview of literature on the topic of determinants of goodwill impairment, and through a study, investigates the proposed associations between goodwill impairment and proxies for economic impairment, earnings management, reputation motives, and conservatism. The study was performed using tobit and logit regressions and included data on 165 publicly listed companies from UK, Germany and Spain, covering a period between 2014 and 2019, with a total of 923 firm-year observations. Goodwill impairment loss and the probability of its recognition, were found to be significantly associated to proxies of economic impairment and a recent change in senior management, while earnings management incentives were found not to have a significant role in accounting for impairment losses in goodwill, except for in the sample of companies from Spain. Conservatism, observed through uncertainty avoidance, was found significant in relation to goodwill impairment loss amount. This thesis contributes to current literature, by having investigated the importance of hypothesized determinants of goodwill impairment, for the most recent observable period, using a multi-country sample.

Keywords

Goodwill impairment, IFRS 3, IAS 36, Economic impairment, Earnings management, Corporate governance, Conservatism

Language used: English

Date on which the thesis was submitted / produced: 24. 5. 2021

Thesis defence

• Date of defence: 24. 6. 2021
• Supervisor: Ing. Oleksandra Lemeshko
• Reader: Ing. Josef Nešleha

Masaryk University

Faculty of Economics and Administration

Master programme / field:
Finance / Finance