The Role of Corporate Governance in Accounting Discretion under IFRS: Goodwill Impairment in Australia

Journal of Contemporary Accounting and Economics, Forthcoming, DOI: 10.1016/j.jcae.2016.10.001

Posted: 28 Oct 2016 Last revised: 17 Nov 2016

See all articles by Humayun Kabir

Humayun Kabir

Auckland University of Technology

Asheq Rahman

Auckland University of Technology - Faculty of Business & Law

Date Written: October 27, 2016

Abstract

A major concern with the adoption of International Financial Reporting Standards (IFRS) is the accounting discretion allowed under the IFRS, and its potential opportunistic use by managers. We examine the role of corporate governance in the accounting discretion inherent in goodwill impairment decisions under the IFRS. More specifically, we investigate whether, in Australia, stronger governance strengthens associations between economic factors and goodwill impairment loss but weakens associations between contracting incentives and goodwill impairment loss. Using data from 2007 to 2012, we find evidence consistent with the notion that stronger governance enhances the associations between economic factors and goodwill impairment loss. However, we find that strong governance cannot completely eliminate the opportunistic use of discretion in an impairment decision, especially when pre-impairment income is negative, and when the impairment occurs in the first year of a CEO’s tenure. Our results are robust with regards to alternative measures of the dependent variable, firm performance variables, and the governance variable, even after controlling for potential self-selection biases.

Keywords: Goodwill Impairment, IFRS, Corporate Governance, Accounting Discretion, Australia

JEL Classification: G34, M41

Suggested Citation

Kabir, Humayun and Rahman, Asheq, The Role of Corporate Governance in Accounting Discretion under IFRS: Goodwill Impairment in Australia (October 27, 2016). Journal of Contemporary Accounting and Economics, Forthcoming, DOI: 10.1016/j.jcae.2016.10.001, Available at SSRN: https://ssrn.com/abstract=2860328

Humayun Kabir (Contact Author)

Auckland University of Technology ( email )

AUT City Campus
Private Bag 92006
Auckland, 1142
New Zealand
+64 21 08309355 (Phone)

Asheq Rahman

Auckland University of Technology - Faculty of Business & Law ( email )

3 Wakefield Street
Private Bag 92006
Auckland Central 1020
New Zealand

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