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Accounting for goodwill under IFRS: A critical analysis

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  • Johansson, Sven-Erik
  • Hjelström, Tomas
  • Hellman, Niclas

Abstract

In 2005, the International Financial Reporting Standards (IFRS) for goodwill accounting replaced the previously used two-component approach (i.e., goodwill amortization plus additional impairment when required) with an impairment-only approach. There has been renewed interest in this issue since the findings of the post-implementation review of IFRS 3. This paper develops a theoretical model of the initial and subsequent accounting for goodwill, that is usable for evaluating the relevance of different standard-setting solutions in this area. The model indicates that the current impairment-only approach creates a buffer that protects accounting goodwill from impairment. The buffer is created as a result of both internally generated core goodwill and the fair value of assets/liabilities not recognized on the statement of financial position. In turn, the impairment test will understate the economic loss and serve as a weak indicator of acquisition success/failure. Based on our model, we propose changing the impairment test procedure so that the same measurement and recognition criteria are employed as at initial recognition. Consequently, the representation of goodwill on the statement of financial position, and the effectiveness of goodwill impairment losses as an indicator, would improve.

Suggested Citation

  • Johansson, Sven-Erik & Hjelström, Tomas & Hellman, Niclas, 2016. "Accounting for goodwill under IFRS: A critical analysis," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 27(C), pages 13-25.
    • Handle: RePEc:eee:jiaata:v:27:y:2016:i:c:p:13-25
    DOI: 10.1016/j.intaccaudtax.2016.07.001
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    References listed on IDEAS

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    3. Martin Glaum & Peter Schmidt & Donna L. Street & Silvia Vogel, 2013. "Compliance with IFRS 3- and IAS 36-required disclosures across 17 European countries: company- and country-level determinants," Accounting and Business Research, Taylor & Francis Journals, vol. 43(3), pages 163-204, June.
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    Cited by:

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    2. Jacqueline Birt & Niclas Hellman & Ann Jorissen & Stephani Mason & Mari Paananen, 2016. "What Is the Way Forward for IASB’s Research Programme under the Evidence-Supported Approach? Some Analyses and Comments Based on the 2015 Agenda Consultation," Accounting in Europe, Taylor & Francis Journals, vol. 13(2), pages 269-283, May.
    3. Roncagliolo, Elisa & Avallone, Francesco, 2022. "Recognition of provisional goodwill: Real need or communication strategy?," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 49(C).
    4. Alain Schatt & Leonidas Doukakis & Corinne Bessieux-Ollier & Elisabeth Walliser, 2016. "Do Goodwill Impairments by European Firms Provide Useful Information to Investors?," Accounting in Europe, Taylor & Francis Journals, vol. 13(3), pages 307-327, September.
    5. Alshehabi, Ahmad & Georgiou, George & Ala, Alessandro S., 2021. "Country-specific drivers of the value relevance of goodwill impairment losses," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 43(C).
    6. d'Arcy, Anne & Tarca, Ann, 2018. "Reviewing IFRS Goodwill Accounting Research: Implementation Effects and Cross-Country Differences," The International Journal of Accounting, Elsevier, vol. 53(3), pages 203-226.

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