Abstract
Goodwill accounting under IFRS is hugely debatable because of the discretion involved in its implication. Goodwill accounts as a residual asset in a business combination and only arises from majority purchase. Subsequently, the value of the goodwill annually tests for impairment or any indication of impairment. However, goodwill impairment is also complex and subjective; because of the fair value method use in its valuation. As a result, goodwill literature mostly focuses on subsequent impairment treatment. During the purchase price allocation, discretion involves goodwill impairment incentivising managers to overcapitalise goodwill. Managers can avoid the routine amortisation of the acquired intangibles if they allocate more value towards goodwill.This thesis critically analyses the existing literature to identify the discretionary factors involve in goodwill recognition and impairment. This thesis argues that; factors that associate with impairment discretion; will also have a similar impact on goodwill recognition and vice-versa. Therefore, contrasting the discretionary elements between goodwill recognition and impairment; unveil significant gaps in goodwill recognition literature.
Discretionary goodwill accounting is an agency problem of management. Therefore, most of the goodwill accounting literature underpinned by agency theory. However, corporate governance is an essential mechanism to mitigate that agency motive; institutional investors are considered a vital force of that mechanism. The findings of this study suggest that; institutional investor investment preference is heterogenic. Dedicated investors reduce the management's agency motive, but transient investors act as a trader, instead of the owner. Also, the index-tracking institution has no ownership engagement in governance.
However, managers should act as a steward of the business rather than an agent. Therefore, a better able manager might mitigate the goodwill impairment problem. This thesis provides evidence that better able CEOs allocate less purchase price towards goodwill to protect the shareholder wealth.
Moreover, because of the complexity in goodwill accounting; external auditor perceives goodwill as a risk of potential material misstatement. Therefore from the institutional theory perspective, this study expects that external will disclose business combination and goodwill related Key Audit Matter (KAM); if goodwill overcapitalise in M&A transaction. This thesis provides evidence that; goodwill capitalisation in M&A transaction triggers the business combination related KAM. Also, it triggers goodwill and intangible related KAM. External auditor disclosure of impairment related KAM force management to realise impairment. However, this study provides evidence that the realisation of goodwill impairment in the income statement is lagged by two years.
| Date of Award | 21 Mar 2021 |
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| Original language | English |
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| Supervisor | Khaled Hussainey (Supervisor) |