An examination of goodwill impairments : UK evidence

This thesis examines the effect of IFRS No.3, Business Combinations, on managers’ accounting choices with respect to the goodwill impairment losses reported by the largest UK firms. While IFRS No. 3 was issued to improve the accounting treatment of goodwill and provide users with more useful and value-relevant information regarding the underlying economic value of goodwill, it has been criticized by academics, practitioners, and dissenting IASB members on the grounds of the managerial discretion inherent in the process of testing goodwill for impairment. It is unclear how IFRS No. 3 has affected the reporting of goodwill impairment losses, including the related managerial flexibility exercised in determining them. Results reveal managers are exercising discretion in the reporting of goodwill impairments following the adoption of IFRS No.3. Specifically, goodwill impairments are more likely to be associated with recent CEO changes, income smoothing and “big bath” reporting behaviours. However, results also indicate that goodwill impairments are strongly associated with economic indicators of impairment and have significant positive associations with effective governance mechanisms as measured by the percentage of independent directors on the board of directors, the number of board meetings, the percentage of shares owned by blockholders holding at least 10% of outstanding shares, and the percentage of shares owned by executive and non-executive directors, suggesting that managers are more likely to be using the discretion afforded by IFRS No.3 to convey their private information and expectations about the underlying performance of the firm rather than acting opportunistically in the write-off year. These inferences are robust to a number of modelling specifications and variable definitions. Further analysis and principal component aggregation of the corporate governance variables provide additional assurance that the perceived managerial reporting incentives are less likely to be opportunistic.EThOS - Electronic Theses Online ServiceGBUnited Kingdo