Does a Goodwill Impairment Regime Better Reflect the Underlying Economic Attributes of Goodwill?

27 Pages Posted: 3 Aug 2011

See all articles by Keryn Chalmers

Keryn Chalmers

Monash University - Department of Accounting

Jayne M. Godfrey

University of Auckland

John Webster

Monash University - Department of Accounting

Date Written: September 2011

Abstract

IFRS adoption transformed the accounting treatment for goodwill in many countries. Instead of amortizing goodwill, firms now test for its impairment and write off impairment losses against income. Accounting standard‐setting bodies claim that an impairment regime better reflects the underlying economic value of goodwill than systematic amortization. We investigate this claim by comparing the association between goodwill accounting charges against income and firms’ economic investment opportunities in amortization and impairment regimes. We find that the association between firms’ goodwill charges against income and the firms’ investment opportunities is stronger during the IFRS regime than the AGAAP regime. This indicates that, as claimed, impairment charges better reflect the underlying economic attributes of goodwill than do amortization charges.

Keywords: Goodwill, Impairment, Amortization, Investment opportunity set, IFRSs

JEL Classification: M40, M41

Suggested Citation

Chalmers, Keryn and Godfrey, Jayne M. and Webster, John, Does a Goodwill Impairment Regime Better Reflect the Underlying Economic Attributes of Goodwill? (September 2011). Accounting & Finance, Vol. 51, Issue 3, pp. 634-660, 2011, Available at SSRN: https://ssrn.com/abstract=1904115 or http://dx.doi.org/10.1111/j.1467-629X.2010.00364.x

Keryn Chalmers (Contact Author)

Monash University - Department of Accounting ( email )

900 Dandenong Road
Caulfield East, Victoria 3145
Australia
+61-3-9903-2867 (Phone)
+61-3-9903-2422 (Fax)

Jayne M. Godfrey

University of Auckland ( email )

12 Grafton Road
Auckland, 1010
New Zealand

John Webster

Monash University - Department of Accounting ( email )

Building 11E
Clayton, Victoria 3800
Australia

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