Do Goodwill Impairments by European Firms Provide Useful Information to Investors?

Forthcoming, Accounting in Europe

34 Pages Posted: 19 Oct 2016 Last revised: 26 Oct 2016

See all articles by Alain Schatt

Alain Schatt

University of Lausanne, HEC-Lausanne

Leonidas C. Doukakis

University of Lausanne, HEC

Corinne Bessieux

Montpellier Business School

Elisabeth Walliser

Université Côte d'Azur

Date Written: October 19, 2016

Abstract

In 2004, the IASB adopted the mandatory annual impairment-test-only of goodwill (IAS 36) instead of amortization of goodwill. We present and discuss the academic literature regarding the association between the goodwill impairment, under this new standard, and the revision of investors’ expectations about a company’s future cash flows. The academic literature highlights that, in some specific cases, IAS 36 may help investors to revise their expectations. More precisely, goodwill impairment seems relevant when: a) there is strong asymmetry of information between managers and investors, b) managers disclose detailed information in the notes regarding their own assumptions about future cash flows, and 3) managers do not manage earnings and provide reliable information to investors. In many cases, goodwill impairment is probably useless for investors because they are able to revise their expectations based on public information, or because they cannot trust the accounting numbers and additional information in the notes about the impairment test, which are provided by (undisciplined) managers. More research is, however, needed to understand in which circumstances impairment-test-only is more useful, as well in which cases it is less adequate. Our analysis relates to the current post-implementation review and should be useful to standard-setters. Before any modification, we argue that standard-setters should carefully consider the economic and the institutional contexts when issuing a new accounting standard.

Suggested Citation

Schatt, Alain and Doukakis, Leonidas C. and Bessieux, Corinne and Walliser, Elisabeth, Do Goodwill Impairments by European Firms Provide Useful Information to Investors? (October 19, 2016). Forthcoming, Accounting in Europe. Available at SSRN: https://ssrn.com/abstract=2854647

Alain Schatt (Contact Author)

University of Lausanne, HEC-Lausanne ( email )

Unil Dorigny, Batiment Internef
Lausanne, 1015
Switzerland

Leonidas C. Doukakis

University of Lausanne, HEC ( email )

Unil Chamberonne, Batiment Anthropole
Lausanne, 1015
Switzerland

Corinne Bessieux

Montpellier Business School ( email )

2300 Avenue des Moulins
Montpellier, 34080
France

Elisabeth Walliser

Université Côte d'Azur ( email )

France

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