Goodwill and the Prediction of Bankruptcy

Abstract: This study investigates whether the transition to IFRS in Sweden with regards to goodwill impairment testing has affected bankruptcy prediction models based on accounting ratios. We compare data from reported IFRS financial statements with simulated Swedish GAAP data to determine the effect on the Skogsvik and Ohlson bankruptcy prediction models. The study shows that there has been a significant change in the level of risk generated from prediction models. The estimates of bankruptcy risk are lower under IFRS accounting than under Swedish GAAP accounting with regards to goodwill accounting. Using default risk from credit ratings as a proxy of actual bankruptcy risk to evaluate the bankruptcy models, we are not able to identify a significant decrease in the predictive ability after the transition to IFRS.