Empirical Evidence on the Application of CGUs in the Context of Goodwill Impairment Testing
28 Pages Posted: 10 Feb 2010
Date Written: February 9, 2010
The transition to IFRS based reporting has resulted in fundamental departures from many of the long accepted norms embedded in indigenous GAAP systems now superseded in IFRS adopting jurisdictions. The rules relating to goodwill accounting, measurement and reporting represent an excellent case in point, the traditionally dominant capitalise and amortise regime having been disposed of in favour of an impairment testing regime pursuant to which periodic amortisation charges are no longer required. There has been much criticism of this new impairment testing regime, principally along the lines that it results in an increased potential for opportunism in financial statement preparation due to the subjective and unverifiable nature of a range of judgements necessary to the execution of the impairment testing process. In this paper, we add to the extant literature’s catalogue of concerns by providing detailed empirical evidence on the nature and impact of cash generating units (CGUs), a central technical element of the IFRS impairment testing regime. These have not been subject to previous detailed empirical research. This paper addresses that gap. It is argued that firms reporting subject to IFRS have a range of opportunities to define and use CGUs in ways inconsistent with the objective of transparent and representationally financial reporting. Several strands of evidence consistent with this contention are presented and discussed.
Keywords: Goodwill, Impairment, Cash Generating Units, IFRS
JEL Classification: M40, M41, M42
Suggested Citation: Suggested Citation