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Does amortization of goodwill effect on companies' profits and future cash flows?

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  • Kazuhiko Kobori

    (Department of Japanese, Wenzao Ursuline University of Languages, 900 Mintsu 1st Road Kaohsiung 80793,Taiwan, R.O.C.)

Abstract

The International Accounting Standards Board (IASB) will discuss whether or not accounting rules for M&A change, and it plans to draw a conclusion in 2021. In view of this fact, it is considered that a series of large M&A have significant effects on corporate earnings worldwide. This paper examines whether the amortization and/or non-amortization of goodwill affect companies’ earnings and future cash flow, an analysis for which there are two reasons. First, IFRS initiates the debate on the premise of goodwill amortization. If goodwill is amortized, it will have a profound impact on corporate profits and cash flow. Second, M&A has recently increased in Japan due to the increase in retained earnings and because IFRS has not requested goodwill amortization. The conclusion is as follows: First, it has become clear that legally retained earnings accelerate M&A because they affect the future goodwill along with both accounting standards. Next, the results revealed that the amortization of goodwill corresponds with the future ROA in conformity with Japanese accounting standards. On the other hand, this study did not determine that goodwill affects ROA in IFRS companies. Particularly, IFRS firms invested greater amounts of money than did Japanese accounting firms. Therefore, IFRS firms' goodwill might not be effective applied to M&A within four years. Key Words: Amortization, Goodwill, IFRS, M&A

Suggested Citation

  • Kazuhiko Kobori, 2020. "Does amortization of goodwill effect on companies' profits and future cash flows?," International Journal of Research in Business and Social Science (2147-4478), Center for the Strategic Studies in Business and Finance, vol. 9(5), pages 255-268, September.
    • Handle: RePEc:rbs:ijbrss:v:9:y:2020:i:5:p:255-268
    DOI: 10.20525/ijrbs.v9i5.842
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    References listed on IDEAS

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    1. Holger Daske, 2006. "Economic Benefits of Adopting IFRS or US-GAAP - Have the Expected Cost of Equity Capital Really Decreased?," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 33(3-4), pages 329-373.
    2. Holger Daske & Luzi Hail & Christian Leuz & Rodrigo Verdi, 2008. "Mandatory IFRS Reporting around the World: Early Evidence on the Economic Consequences," Journal of Accounting Research, Wiley Blackwell, vol. 46(5), pages 1085-1142, December.
    3. Holger Daske, 2006. "Economic Benefits of Adopting IFRS or US‐GAAP – Have the Expected Cost of Equity Capital Really Decreased?," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 33(3‐4), pages 329-373, April.
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    Keywords

    amortization; goodwill; ifrs; m&a;
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