Evidence on IFRS Goodwill Impairment Testing by Australian and New Zealand Firms

22 Pages Posted: 9 Feb 2010

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: February 9, 2010


The purpose of this paper is to provide evidence relating to the potential for and extent of opportunistic exercise of discretion by large Australian and New Zealand reporting entities undertaking goodwill impairment testing pursuant to the IFRS framework. The research question is addressed using an empirical archival approach. Independent risk adjusted estimates of firm discount rates are calculated for a sample of 124 Australian and New Zealand listed firms, and an analysis of variances between these rates and those adopted by sample firms undertaken for the purposes of ascertaining evidence of potential opportunism in discount rate selection. Evidence consistent with opportunism in the selection of discount rates is reported. The results suggest the existence of a bias among Australian and New Zealand firms towards the application of lower than expected discount rates. This is interpreted as evidence of the opportunistic exercise of discretion to avoid unwanted impairment losses. The results raise doubts as to the efficacy of the IFRS impairment testing process in practice and suggest the need for greater rigour and vigilance on the part of auditors and regulators overseeing entities reporting pursuant to IFRS. This is one of a limited number of empirical studies into the effect of the IFRS goodwill impairment testing regime in practice in Australia and New Zealand. The paper provides new empirical insights into the operation of the IFRS regime, in particular, the key dimension of discount rate selection by reporting entities.

Keywords: Goodwill, Financial Reporting, Creative Accounting, Impairment Accounting, Discount Rates, New Zealand, Australia

JEL Classification: M40, M41

Suggested Citation

Carlin, Tyrone M. and Finch, Nigel, Evidence on IFRS Goodwill Impairment Testing by Australian and New Zealand Firms (February 9, 2010). Available at SSRN: https://ssrn.com/abstract=1550425 or http://dx.doi.org/10.2139/ssrn.1550425

Tyrone M. Carlin

Southern Cross University ( email )

Lismore, New South Wales 2480

The University of Sydney Business School ( email )

Cnr. of Codrington and Rose Streets
Sydney, NSW 2006
+ 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 )


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