Evidence on the Use of Outlier Discount Rates in IFRS Goodwill Impairment Testing
24 Pages Posted: 10 Feb 2010
Date Written: February 9, 2010
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 asset’s recoverable amount, the judgment 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 or manage the timing of impairment losses to the detriment of transparency, comparability and decision usefulness. This study provides evidence consistent with the opportunism on the part of financial statement preparers, by demonstrating the existence of variances between independently generated risk adjusted discount rates and those disclosed as having been used by a sample of large listed Australian companies.
Keywords: Goodwill, Financial Reporting, Creative Accounting, Impairment Accounting, Discount Rates
JEL Classification: M40, M41
Suggested Citation: Suggested Citation