Disclosure of Goodwill Impairment-Testing in a time of Great Uncertainty - a Study on Large Public European Firms

Abstract: In this paper, we investigate firms' disclosure quality of goodwill impairment-testing under IAS 36, and whether it changes when there is a sudden increase in uncertainty in the macroeconomic environment, as experienced during the Covid-19 crisis in 2020. We define disclosure quality as the transparency in the reporting of the goodwill impairment-testing process and we proxy this as the width of information components disclosed under IAS 36. Using an index to measure disclosure quality, we further differentiate between two types of impairment-testing disclosures, prospective and descriptive. The former relates to disclosure items that provide information on valuation estimates and other management assumptions, and the latter relates to information such as descriptions of the standard and the impairment-testing procedure. Furthermore, we analyse if there is a difference in firms' change in disclosure quality during the crisis depending on to what degree they have experienced heightened uncertainty regarding their future operations. Based on a sample of large publicly traded European firms reporting under IFRS, studying the period 2018-2020, we find evidence suggesting that the total disclosure quality of goodwill impairment-testing increased during the Covid-19 crisis. The result seems to be driven by an increase in prospective disclosures, and not descriptive disclosures, as we only find an association between prospective disclosure quality and the crisis year. Furthermore, the results indicate that the observed association apply to all firms, regardless of to what degree they have been impacted by the crisis.