Impairment-testing of Goodwill -A Study of Companie's Reasoning Behind the Impairment-testing

Abstract

Background and Problem Discussion: The amount of goodwill in Swedish companies has increased, while the write-offs have remained at a low level. The impairment-testing also demands a lot of discretion on part of the companies. This discretion will come to have considerable effect on the companies’ impairment-testing results. Purpose: The purpose of this study is to examine how some industrial companies, reason behind the assumptions made in their impairment testing of goodwill, as well as to analyze some of the possible consequences of these assumptions. Limitations: The study’s focus is on the impairment of goodwill and will not analyze the reasons for why goodwill is capitalized. The study’s focus will therefore be on IAS 36 Impairment of Assets, rather than IFRS 3 Business Combinations. Method: A set of four semi structured interviews with three group reporting managers and two CFOs. Empirical data has also been gathered from companies’ financial reports. The empirical data has been analyzed from a frame of reference focusing on the impairment of goodwill and institutional theory. Result and conclusions: There is a established praxis in what method the studied companies have chosen to use. It also seems that the companies’ auditors and the stock market have had a big impact in the development of this praxis. The evidence also suggests that the impairmenttesting is institutionalized. Suggestions for Future Research: For future research it would be interesting to further investigate the assessments used in impairment testing of goodwill. Another avenue for future studies could be to study auditors and their influence in company’s decision process when it comes to choosing valuation methods and models.