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
Date Written: October 13, 2008
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: Suggested Citation