Indicators of goodwill impairments: Pre- and post-acquisition indicators ability to predict future impairments

Abstract: Companies allocate the majority of the acquisition price to goodwill, which has resulted in goodwill to become a prominent asset on companies balance sheets. Research shows that goodwill impairments lag behind the economic reality between two to four years and that the current accounting regime does not provide adequate disclosures to predict future impairments. The purpose of this paper is to examine what factors that can predict the occurrence of future goodwill impairments. We carry out our investigation by choosing several pre-acquisition and post-performance indicators, which we hand-collect from companies’ annual reports. Our sample includes acquisitions made by Swedish listed companies during the period 2005 to 2011. To examine the predictability of goodwill impairments we carry out a series of binary logistic regressions in which goodwill write-offs are predicted by our acquisition and performance indicators. Our results suggest that information on acquisition activity, change in segment-level return on assets and firm-level return on assets are useful to predict goodwill impairments. Although our findings indicate that information surrounding the acquisition and subsequent performance can be helpful in predicting future impairments there is still difficulties for external stakeholders to predict goodwill write-offs. This is due the fact that a majority of acquisitions lack adequate information on the acquired goodwill. Consequently, our findings have implications for the accounting literature and standard setters since it is questionable whether financial statements and their disclosures provide sufficient and relevant information to evaluate the economic reality of goodwill balances.