A Research On The Economic Consequences Of Goodwill Impairment Accounting

When ushering in a knowledge-based economy era,more and more companies from both China and abroad have been engaged in M&As.Both Chinese and foreign scholars are concerned about how to revise the accounting principles regarding goodwill.Under the guide of decision-usefulness view,many nations including China have revised their accounting standards of goodwill.America first put forward SFAS 142 that eliminated the long-accepted practice of systematic amortization of goodwill acquired in business combinations;instead,the standard required companies to review goodwill for impairment at regular intervals and to recognize a loss if goodwill is impaired.CAS-NO.8 Asset Impairment that came into force in February,2006,also revised its old version.Available research findings show that the Chinese new accounting standards significantly improved the quality of accounting information and the value relevance of financial reports.But there still stands a chance that goodwill impairment accounting principles could be used by managers with opportunism behavior.Besides,public companies may take less goodwill write-offs than expected and delay the time of conformation,which will ruin the reliability of accounting information and violate the decision-usefulness view,imposing a negative impact on the sustainable development of the Chinese capital market and investors,confidence.The goodwill amounts to the excess of the purchase consideration(the money paid to purchase the asset or business)over the total value of the assets and liabilities.The reason why the buyer is willing to pay the excess part lies in that it expects to get the compensation back from the later synergy effects that generate from the combination of the parent and daughter company.Once the goodwill is impaired,it may be indicated that the expected synergy effects may have disappeared.How will the stakeholders respond to the goodwill impairment information then?Are they concerned about it?If public companies offer to reveal goodwill impairment,it may suggest they may have lost confidence on future cash flows of its asset units and the recoverable amount may be lower than the book amount.The decreasing cash flows are a barometer of deteriorating financial situations,which will be reflected in its stock prices.As a long-lived asset,goodwill impairment will have a long-time negative influence on the corporate performance.So what’s the real link between goodwill impairment and corporate market value?Our sample includes firms that announced goodwill impairment losses during the period 2001-2012.This paper carried out an empirical study on the economic consequences of goodwill impairment accounting from the perspective of short-term and long-term market reaction after summarizing the basic situation in which the goodwill impairment test is required annually.Main conclusions are as follows:(1)The Chinese market responds negatively to goodwill impairment significantly.The average and minimum value of abnormal returns take on a "V" trend in the event window.Accounting irregularities may make this negative reaction stronger.(2)Goodwill impairment losses are more value relevant compared to goodwill amortization.Besides,there is a negative and significant association between reported transitional goodwill-impairment losses and cumulative annual returns that lag two years behind.CAS-N0.8 Asset Impairment could help convey some company’s private information about future cash flows to stakeholders,mitigate information asymmetry and lower agency cost.But the new principles also witnessed a great increase in the violent fluctuation of goodwill write-offs as well as the number of companies selling their subsidiaries as an effort to restore previously booked goodwill impairment.It suggests that managerial discretion may cause some opportunism behavior.Based on the above analysis and conclusions,it is suggested that:relevant authorities should detail the current Chinese accounting standards regarding goodwill impairment and revise the relative policies concerning M&As;Audit organizations including audit committee and certificated public accountants should bear more professional responsibilities and polish up their skills.