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Discretionary goodwill impairment losses in Europe

Author

Listed:
  • Marius Gros
  • Sebastian Koch

Abstract

Purpose - The impairment-only approach to goodwill has regularly been criticized for offering too much discretion to managers and facilitating the manipulation of goodwill impairment losses. Extant research provides mixed results on whether managers exploit their inherent discretion informatively or opportunistically. The purpose of this paper is to examine the determinants of discretionary goodwill impairment losses in Europe. Design/methodology/approach - The authors divide goodwill impairment losses into economically induced and discretionary parts. Thereafter, the authors examine the determinants of discretionary goodwill impairments. Findings - The results indicate that discretionary goodwill impairment losses are used opportunistically rather than informatively. The authors find that managers exploit their discretion to “clear the deck” and to meet or beat analysts’ forecasts. However, the opportunistic behavior is constrained by corporate governance and enforcement mechanisms. Research limitations/implications - The findings contribute to the current discussion on the suitability of the impairment-only approach by introducing inferences on how areas of discretion inherent in goodwill impairment testing are associated with management incentives and governance mechanisms in a European setting. Practical implications - The results offer enforcers and standard-setters important insights into how mangers exploit discretion in goodwill accounting. These insights can help to identify firms that are likely to infringe upon the applicable accounting standards. Originality/value - In contrast to prior research, the authors analyze the association among management incentives, governance mechanisms and discretionary goodwill impairment losses rather than the association with total or expected goodwill impairment losses. Moreover, to the best of authors’ knowledge, there is little empirical evidence based on a European (IAS 36) setting.

Suggested Citation

  • Marius Gros & Sebastian Koch, 2019. "Discretionary goodwill impairment losses in Europe," Journal of Applied Accounting Research, Emerald Group Publishing Limited, vol. 21(1), pages 106-124, September.
  • Handle: RePEc:eme:jaarpp:jaar-03-2018-0039
    DOI: 10.1108/JAAR-03-2018-0039
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    Citations

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    Cited by:

    1. Han, Hongwen & Tang, Jiali Jenna & Tang, Qingquan, 2024. "The role of large shareholders in goodwill impairment decisions – Evidence from China," Emerging Markets Review, Elsevier, vol. 59(C).
    2. Jorge Pallarés Sanchidrián & Javier Pérez García & José A. Gonzalo-Angulo, 2021. "Discretion in the application of the goodwill impairment test in European banks," Remef - Revista Mexicana de Economía y Finanzas Nueva Época REMEF (The Mexican Journal of Economics and Finance), Instituto Mexicano de Ejecutivos de Finanzas, IMEF, vol. 16(TNEA), pages 1-24, Septiembr.

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