The value relevance of goodwill is a topic of ongoing discussion in accounting, because of the nature of this intangible asset, and changes in the accounting standards regarding the disclosure of goodwill and goodwill impairment. International Financial Reporting Standard (IFRS) 3 was implemented in March 2004 with the aim of improving the reliability of goodwill accounting, introducing a major change, namely the requirement to test annually for goodwill impairment.
The aim of this study was to determine the value relevance of goodwill after the introduction of IFRS 3 in a specific setting, namely South Africa, using JSE-listed firms as a sample. It also investigated the determinants for both goodwill impairment decisions and the disclosure quality of goodwill impairments, as well as the value relevance of goodwill impairment and its disclosure. Finally, the study considered the explanation strategies used by management to provide reasons for goodwill impairment. Panel least squares regressions and a cluster analysis were used to analyse JSE-listed firms for the period from 2006 to 2017.
The findings show that goodwill is indeed value relevant. Significant predictors of goodwill impairment were found to be potential earnings management, whether a firm was goodwill intensive, and corporate governance mechanisms. Goodwill impairment in itself was not value relevant, but it was a predictor of market value when its disclosure was taken into account. Findings indicated that goodwill impairment test-related disclosure was negatively associated with a firm’s market value. Firms that provided an excuse for impairing goodwill, without taking responsibility for that impairment, tended to have higher quality of disclosure than firms that did not provide any reason for goodwill impairment at all.
The study contributes to the existing literature by presenting evidence that goodwill is value relevant in the South African setting after the introduction of IFRS 3, and that when investors determine a firm’s market value, investors simultaneously assess goodwill impairment and its disclosure. How reasons for impairment are provided by management also provides insight into the quality of goodwill impairment disclosure.