How Do Firms Implement Impairment Tests of Goodwill?

This study seeks first to examine how firms implement impairment tests as required by IAS 36, and second, to explore factors which may explain why some firms are not entirely in compliance with IAS 36. It is based on a survey which includes 58 completed questionnaires representing 73% of the firms on the Copenhagen Stock Exchange that recognize goodwill on the balance sheet. The findings imply a variety in the application of IAS 36. Based on our analysis, it is difficult to determine whether this simply indicates that firms adopt an approach suited to their organizational and economic structures, or if it reveals that firms are uncertain as how to apply the standard. Our analysis further indicates inconsistencies in the implementation of IAS 36. This includes both how firms define a CGU and how they estimate the recoverable amount. Further, multivariate analysis reveals that the inconsistencies detected here are less likely in firms that systematize the procedures for impairment testing and use persons with considerable valuation experience. The findings should be of interest to a number of parties including firms, financial advisers, auditors, standard setters and users of financial statements.