Abstract

This study analytically examines the information usefulness of goodwill impairment losses based on the Korea International Financial Reporting Standards (K-IFRS) No. 1103, 'Business Combinations.' According to the recent exposure draft on business combinations issued by the Korea Accounting Institute, the acquisition method, which is based on exchange value similar to other asset acquisitions, provides more useful information for evaluating the future cash-generating ability of net assets acquired through business combinations compared to the pooling-of-interests method. This logic serves as the basis for unifying accounting treatments for all business combinations under the acquisition method. Furthermore, since the amortization period for goodwill permitted under current standards allows for significant managerial discretion, the regulations mandate that goodwill be tested for impairment annually rather than being amortized over a subjective period. This regulation is consistent with K-IFRS No. 1103. The empirical results of this study indicate that goodwill impairment losses generally have a positive effect on firm value due to expectations of improved future earnings, whereas goodwill amortization does not show value relevance. Specifically, the stock price multiplier for goodwill impairment losses is found to be greater than that for goodwill amortization. However, the value relevance of goodwill impairment losses varies depending on the incentives for recognition. Impairment losses recognized due to opportunistic managerial behavior show no value relevance, while those recognized by firms with high future growth potential have a positive effect on firm value. Conversely, for firms with low financial stability, the recognition of goodwill impairment losses has a negative effect on firm value. This study is significant as it provides empirical evidence on the appropriateness of fair value accounting required for recognizing goodwill impairment losses in the context of the full adoption of international accounting standards. Furthermore, given the rapidly changing corporate environment, it highlights that the incentives behind recognizing goodwill impairment losses play a crucial role for stock market participants in evaluating firm value.

Keywords

• International Financial Reporting Standards (IFRS)
• Goodwill Amortization
• Goodwill Impairment Loss
• Korea Accounting Institute

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