Evidence on the Use of Outlier Discount Rates in IFRS Goodwill Impairment Testing

24 Pages Posted: 10 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

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 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

Carlin, Tyrone M. and Finch, Nigel, Evidence on the Use of Outlier Discount Rates in IFRS Goodwill Impairment Testing (February 9, 2010). Available at SSRN: https://ssrn.com/abstract=1550432 or http://dx.doi.org/10.2139/ssrn.1550432

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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