Goodwill hunting? A study on the proportion of purchase price allocated to goodwill under IFRS
Abstract: The principle-based IFRS framework allows for a high level of managerial discretion in the purchase price allocation and in the subsequent impairment testing of goodwill. Hellman et al. (2012) explain how a high allocation to goodwill under IFRS 3 can increase reported earnings since goodwill in many cases never becomes fully impaired, depending on the existence of certain firm characteristics. Few empirical studies have been conducted in an IFRS context on how different types of firm characteristics affect the proportion of purchase price allocated to goodwill. We aim to contribute to filling this gap by conducting a quantitative study on the relationship between the proportion of the purchase price allocated to goodwill and two types of firm characteristics, i.e. the possibility to protect goodwill from impairment and the motive to increase reported earnings. By analyzing 195 observations between 2007 and 2011, from 62 stock-listed Swedish firms, we find the following: (1) Acquirers with larger possibilities to protect goodwill from impairment tend to allocate more to goodwill than otherwise expected. (2) Acquirers which have larger motives to increase reported earnings, contrary to expectations tend to allocate less to goodwill than otherwise expected.
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