Discount Rates in Disarray: Evidence on Flawed Goodwill Impairment Testing

MGSM Working Paper No. 2008-11

28 Pages Posted: 14 Oct 2008 Last revised: 29 Nov 2008

See all articles by Tyrone M. Carlin

Tyrone M. Carlin

Southern Cross University; The University of Sydney Business School

Nigel Finch

Saki Partners

Date Written: October 13, 2008

Abstract

Discount rate selection represents a centrally material factor impacting valuation models. Given the strong reliance on discounted cash flow modelling as a basis for determining an assets recoverable amount, the judgement exercised by reporting entities regarding rate selection is of paramount importance in influencing the outcomes of the impairment testing process conducted under IFRS. The discretion surrounding rate selection could be used opportunistically to avoid impairment losses at the detriment of transparency, comparability and decision usefulness. The objective of the study is to compare the discount rates disclosed by a sample of large Australian firms with independently generated discount rates.

Keywords: Goodwill, Financial Reporting, Creative Accounting, Impairment Accounting

JEL Classification: G12, M41, M44, M43, M47

Suggested Citation

Carlin, Tyrone M. and Finch, Nigel, Discount Rates in Disarray: Evidence on Flawed Goodwill Impairment Testing (October 13, 2008). MGSM Working Paper No. 2008-11 . Available at SSRN: https://ssrn.com/abstract=1283647 or http://dx.doi.org/10.2139/ssrn.1283647

Tyrone M. Carlin

Southern Cross University ( email )

Lismore, New South Wales 2480
Australia

The University of Sydney Business School ( email )

Cnr. of Codrington and Rose Streets
Sydney, NSW 2006
Australia
+ 61 2 9036 7230 (Phone)
+61 2 9351 7471 (Fax)

HOME PAGE: http://sydney.edu.au/business/staff/tyronec

Nigel Finch (Contact Author)

Saki Partners ( email )

Australia

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