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Management’s Discretionary Assessments of Goodwill Impairments—Evidence from STOXX Europe 600

Author

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  • Frode Kjærland

    (NTNU Business School, Norwegian University of Science and Technology, 7491 Trondheim, Norway)

  • Kristian Forbord

    (NTNU Business School, Norwegian University of Science and Technology, 7491 Trondheim, Norway)

  • Are Oust

    (NTNU Business School, Norwegian University of Science and Technology, 7491 Trondheim, Norway)

  • Håkon Stephani

    (NTNU Business School, Norwegian University of Science and Technology, 7491 Trondheim, Norway)

Abstract

The main issues of accounting reporting regarding goodwill are whether a firm’s management reliably conveys their private information about future earnings, and whether they disclose value-relevant and useful information to accounting users. In the current International Financial Reporting Standards (IFRS) regulations, the goodwill impairment test is based on management’s discretionary assessments. This study examines how goodwill impairment is reported under IFRS considering company- and industry-specific economic factors, proxies for earnings management, and macroeconomic crisis years. We extend previous research using tobit and logit regressions by employing a fixed-effects model. This approach is possible because of a panel dataset comprising 449 of 600 active companies sampled from the STOXX Europe 600 index from 2005 to 2018. We find that goodwill impairments are largely concentrated in certain companies, industries, and years. The regression models show a significant negative correlation between companies’ return on total assets and goodwill impairments. Moreover, we discover that goodwill impairments have a significant positive correlation with goodwill intensity, debt ratio, and the proxy for reporting a one-off big bath charge. In addition, we find that the global financial crisis in 2008–2009 and the European debt crisis in 2011 differ significantly from other fiscal years.

Suggested Citation

  • Frode Kjærland & Kristian Forbord & Are Oust & Håkon Stephani, 2023. "Management’s Discretionary Assessments of Goodwill Impairments—Evidence from STOXX Europe 600," IJFS, MDPI, vol. 11(2), pages 1-26, June.
    • Handle: RePEc:gam:jijfss:v:11:y:2023:i:2:p:81-:d:1175600
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    References listed on IDEAS

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    1. Hausman, Jerry, 2015. "Specification tests in econometrics," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 38(2), pages 112-134.
    2. Henry Jarva, 2009. "Do Firms Manage Fair Value Estimates? An Examination of SFAS 142 Goodwill Impairments," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 36(9-10), pages 1059-1086.
    3. Neerav Nagar & Kaustav Sen, 2017. "Do financially distressed firms misclassify core expenses?," Accounting Research Journal, Emerald Group Publishing Limited, vol. 30(2), pages 205-223, July.
    4. Henry Jarva, 2009. "Do Firms Manage Fair Value Estimates? An Examination of SFAS 142 Goodwill Impairments," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 36(9‐10), pages 1059-1086, November.
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