Discretions that managers can use in goodwill impairment testing

Discretions That Managers Can Use in Goodwill Impairment Testing

Reporting regimes on impairment for goodwill has been greatly adopted in many jurisdictions. Its adoption has facilitated the value significance of any internal financial records and information. Apart from the finances, the reporting regimes for goodwill has strategically retrieved internal information and made it public. Managers highly determine the effectiveness and simplicity of goodwill impairment testing, Lemans (2009). The techniques used in measuring impairment depend on the manager’s thoughts and decisions. Accounting assumptions made by managers determine impairment testing under the current testing regimes. Such assumptions later on seen to have consequences on the whole process of goodwill impairment testing. The best time required for impairment can also be a result of discretion in management. At the same time managers may alter goodwill impairment charges and give out a report on unnecessary items. For instance, Ji (2013) analyses the extent of discretion among managers of the United States carrying out goodwill impirement testing regime. It is clear that discretion in association with the managerial choices can cause a no impairment in cases where an impairment of goodwill exists. Two critical issues surface when it gets to point where an impairement is in need. The managerial either drag the process of goodwill impairment or do away with the process.

Goodwill has recently become more efficient when it comes to managing sheets of macro enterprises. The impairment testing regime coded SFAS 142 adopted in the United States after a free goodwill impairement regime for systematic amortisation was a clear indicator of the managerial’s effort to delay or avoid goodwill reports. This is mainly because of the change to efficient yearly impairment tests. SFAS 142 directs managers to adopt favorable techniques to estimate goodwill impairment. By so doig they can be able to refer to these discretions to release internal information on various expenditures as long as they don’t use the discretion to meet their demands. According to Ramanna and Watts (2008) managerial discretion greatly influences non-impairment of goodwill. Information on fair value acccounting of properties is exposed inn relation to their current value estimates. These estimates cann also be approved by just having a look of the respective prices in the market. Therefore such estimates are not able to be classified as viable or not viable. Financial researchers highly critisize such unverifiable measures that give managers an opportunity to give out internal information of how cash is intended to be used in future.

SFAS 142 also established a goodwill mpairement test that gives the managers an opportunity to make use of their approximate value that is slightly higher thann the real market value when determining an impaired goodwill. The ability to practise discretion in impairment poses as one of the iitial problems. Ramanna and Watts (2008) carried out an exercise to establish wether goodwill impairment can be achieved. They found out that managers practising goodwill with an experience of market-to- book ratio descending from one and above to below are more likely to posses impaired goodwill.From their research it was clear that 71% of the samples that thay used in their study avoided goodwill. At the same time the sample firms also delayed goowill write offs. This was even possible with the equity market indications of impairment in place. A statistical presentation of important multivariate proof that the adoption of SFAS 142 on fair value estimates can facilitate the ability of firms to deal with the management of goodwill impairment. In the same research the return of liabilities as used as a major proof for goodwill impairment. According to them, firms getting a return of less than 2% in two years were not in a position to impair their goodwill. From their research it is evident that the regime on goodwill impairment testing gives a chance for firms to adjust past earnings.

According to SFG (2012), Shinhan Financial group was the first private financial company to be put up in Korea in 2001. The company has really grown after merging with companies such Goodmorning Shinhan Securities and Shinhan Life Insurance among others. This has resulted to goodwill amounting to KRW 3,828 billion being carried out on consolidated financial statements at the end of 2012. IFRS was adopted in 2010 and by this time had amortized goodwill in 20 years. This was closely folowed by an accompanying test under the Korean laws. SFG has therefore been making and conveying financial information since 2011 hence it has been able to try goodwill got from business mergings for impairment yearly.

Adoption of goodwill impairment test can rely on the firm’s legal settings and the coresponding capital market. Recent researches have pointed out rare adoption of standards across the world that facilitate quali t reporting of cash flows. The acts of goodwill impairement work hand in hand with the managerial incentives. In this case a firm can impair goodwill only if the manager has recently transformed. This applies to countries where such laws have not been enforced comes in easily with the year before the impairment process. On the other hand countries that highly enforce these laws convey goodwill impairment losses on time. Companies with goodwill are supposed to carry out impairment tests after each year. The tests should be consistent annually.

Work Cited

Ji, Kaiying. «Better Late than Never, the Timing of Goodwill Impairment Testing in Australia.» 2013. CPA Australia. 20 April 2016 <file:///C:/Users/Toshiba%20Satellite/Downloads/Article%20and%20Example%20Ji-2013-Australian_Accounting_Review.pdf>.

Lemans, Jamilla. «Goodwill Impairment as a Tool for Earnings Management .» 2009. Accountability. 21 April 2016 <file:///C:/Users/Toshiba%20Satellite/Downloads/114-137_lemans.pdf>.

Ramanna , Karthik and L. Ross Watts . «Evidence from Goodwill Non-impairments on the Effects of Unverifiable Fair-Value Accounting.» 15 May 2008. 08-014. 21 April 2016 <http://www.hbs.edu/faculty/Publication%20Files/08-014.pdf>.

SFG. «AP2 Accounting for Goodwill.» 2012. Shinhan Financial Group. 21 April 2016 <http://www.ifrs.org/The-organisation/Advisory-bodies/EEG/Documents/AP2%20Accounting%20for%20Goodwill.pdf>.