Goodwill Accounting Case Study

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Goodwill and accounting discretion. Evidence from Italy Abstract Purpose: The aim of the paper is to investigate earnings management practices related to goodwill accounting, focusing on its first recognition as well as its write-offs, due to the impairment test. Design/methodology/approach: The study refers to a sample of Italian listed firms and the analysis covers three years, with a total of 591 firm-year observations. The modified Jones’ regression model has been used in estimating discretionary accruals, as a proxy of earnings management practices. Findings: A positive relationship between discretionary accruals and yearly changes in goodwill has been proved. Findings also show an incidence of leverage and performance. Research limitations/implications:…show more content…
In fact, several accounting treatments have been suggested over the years: immediate write off against reserves; capitalisation and subsequent amortisation over a predefined period; capitalisation with the annual impairment test (Alves 2013). Focusing on FASB’s as well as IASB’s pronouncements, the following table summarises the evolution of these accounting treatments. Table 1: Key developments concerning goodwill accounting Period Standard setter Standard Key developments 1970 APB (USA) Opinion no. 17 Amortisation of goodwill over a period not exceeding 40 years 1983 IASB IAS 22 Amortisation of goodwill over a period not exceeding 20 years (also permitting to charge goodwill to equity at the acquisition date) 1993 IASB IAS 22 revised Charging goodwill to equity at the acquisition date is not longer permitted 1999 FASB (USA) ED Proposal of shorten the maximum amortisation goodwill period from 40 to 20 years 2001 FASB (USA) SFAS 141/142 The pooling-of-interest method is abolished. Amortisation of goodwill is prohibited, requiring a regular impairment test 2004 IASB IFRS 3 Alignment with US GAAP (introduction of impairment test ending…show more content…
The main reason why standard setters decided to substitute amortisation with impairment is that the first approach is expected to be based on an arbitrary time period, failing to provide useful information to the users of financial statements (Jennings et al. 2001; Moehrle et al. 2001): requiring amortisation of a fixed amount of goodwill every year implicitly requires that goodwill decreases on a systematic basis, but this is not necessarily the case. Accordingly – and focusing on the IASB’s pronouncements – the IFRS 3: • Replaces the IAS 22, opting for the purchase method to be accounted business combinations and requiring goodwill (acquired individually or in a business combination) to be recognized as an
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