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Paper 08-02
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The paper does not represent the official views of EFRAG or any individual member of the EFRAG Board or
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considered appropriate in the circumstances.
WHAT DO WE REALLY KNOW ABOUT
GOODWILL AND IMPAIRMENT?
EFRAG
A QUANTITATIVE STUDY
OCTOBER 2016
What do we really know about Goodwill and Impairment?
1
EFRAG Board meeting
7-8 September 2016
Paper 08-02
© 2016 European Financial Reporting Advisory Group.
The European Financial Reporting Advisory Group (EFRAG) issued this Quantitative Study.
The Quantitative Study is available on the EFRAG website. A limited number of copies of the
Quantitative Study will also be made available in printed form, and can be obtained from EFRAG.
The paper invites comment on its proposals via the ‘Questions to Constituents’. Such
comments should be submitted through EFRAG’s website here [INSERT HYPERLINK] or by
post to:
EFRAG
35 Square de Meeûs
B-1000 Brussels
Belgium
so as to arrive no later than 31 December 2016. All comments received will be placed on the
public record unless confidentiality is requested.
What do we really know about Goodwill and Impairment?
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EFRAG Board meeting
7-8 September 2016
Paper 08-02
Our Proactive Work in Europe
This paper is part of the EFRAG’s proactive work. EFRAG aims to influence future standardsetting developments by engaging with European constituents and providing timely and effective
input to early phases of the IASB’s work. EFRAG carried out this proactive work in partnership
with National Standard Setters in Europe to ensure resources are used efficiently and to promote
stronger coordination at the European level. Four strategic aims underpin proactive work:

engaging with European constituents to ensure we understand their issues and how financial
reporting affects them;

influencing the development of global financial reporting standards;

providing thought leadership in developing the principles and practices that underpin financial
reporting; and

promoting solutions that improve the quality of information, are practical, and enhance
transparency and accountability.
More detailed information about our proactive work and current projects is available on the
EFRAG website.
What do we really know about Goodwill and Impairment?
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Table of Contents
OUR PROACTIVE WORK IN EUROPE ................................................................................................... 3
TABLE OF CONTENTS ........................................................................................................................... 4
EXECUTIVE SUMMARY .......................................................................................................................... 6
OBJECTIVE AND STRUCTURE OF THE QUANTITATIVE STUDY ........................................................................ 6
GOODWILL AND IMPAIRMENT REQUIREMENTS UNDER IFRS ........................................................................ 6
HIGHLIGHTS OF THE EUROPEAN DATA....................................................................................................... 7
HIGHLIGHTS OF THE INTERNATIONAL COMPARISON .................................................................................... 8
QUESTIONS TO CONSTITUENTS ........................................................................................................ 10
CHAPTER 1: WHY ARE WE PUBLISHING THIS QUANTITATIVE STUDY? ...................................... 11
W HAT HAVE EFRAG AND THE IASB BEEN DOING ON GOODWILL AND IMPAIRMENT? .................................. 11
THE IMPAIRMENT-ONLY MODEL FOR GOODWILL........................................................................................ 12
OBJECTIVE AND STRUCTURE OF THE QUANTITATIVE STUDY ...................................................................... 13
LIMITATIONS INHERENT TO THIS TYPE OF STUDY ...................................................................................... 13
CHAPTER 2: EUROPEAN DATA .......................................................................................................... 15
DEFINITION OF THE SAMPLE ................................................................................................................... 15
GOODWILL ............................................................................................................................................ 15
Evolution of goodwill ....................................................................................................................... 15
Trend of goodwill as a percentage of total assets .......................................................................................17
Trend of goodwill as a percentage of net assets ......................................................................................... 18
Level of concentration of goodwill ................................................................................................... 19
How could the data be used in the debate?.................................................................................... 20
GOODWILL IMPAIRMENT LOSSES ............................................................................................................. 20
Evolution of goodwill impairment losses ......................................................................................... 20
Intensity of goodwill impairment ...................................................................................................... 21
Timing of impairments ..................................................................................................................... 23
Level of concentration of impairments ............................................................................................ 23
How could the data be used in the debate?.................................................................................... 25
TRENDS IN 2015 ................................................................................................................................... 25
INDUSTRY ANALYSIS .............................................................................................................................. 25
Evolution of goodwill by industry ..................................................................................................... 25
Goodwill over total assets by industry ............................................................................................. 26
Goodwill over net assets by industry .............................................................................................. 26
Goodwill impairment intensity by industry ....................................................................................... 27
Industry focus .................................................................................................................................. 28
Telecommunication Services ......................................................................................................................28
Healthcare ..................................................................................................................................................30
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Information Technology .............................................................................................................................. 32
Goodwill and nature of consideration .............................................................................................. 34
How could the data be used in the debate?.................................................................................... 35
CHAPTER 3: INTERNATIONAL COMPARISON .................................................................................. 36
INTRODUCTION ...................................................................................................................................... 36
DEFINITION OF THE SAMPLE ................................................................................................................... 36
GOODWILL ............................................................................................................................................ 37
Evolution of goodwill ....................................................................................................................... 37
Evolution of average goodwill per company ................................................................................... 37
Goodwill changes ............................................................................................................................ 38
Trend in goodwill as a percentage of net assets ............................................................................ 40
Trend in goodwill as a percentage of market capitalisation ............................................................ 41
Level of concentration of goodwill in 2014 ...................................................................................... 42
Companies that accounted for 50% of total goodwill in 2014 (subpopulation) ............................................42
Number of companies that recognised goodwill exceeding 50% and 100% of their net assets or market
capitalisation in 2014 ..................................................................................................................................43
Market capitalisation vs net assets ................................................................................................. 43
GOODWILL IMPAIRMENT LOSSES ............................................................................................................. 46
Evolution of goodwill impairment losses ......................................................................................... 46
Intensity of goodwill impairment ...................................................................................................... 49
INDUSTRY ANALYSIS .............................................................................................................................. 50
Average goodwill per company by industry in 2014 ....................................................................... 50
Goodwill as a percentage of net assets by industry in 2014 ........................................................... 50
APPENDIX 1 – SOME EVIDENCE FROM ACADEMIC RESEARCH ................................................... 52
APPENDIX 2 – BIBLIOGRAPHY ........................................................................................................... 54
ACKNOWLEDGMENTS ......................................................................................................................... 55
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Executive Summary
Objective and structure of the quantitative study
ES1 The accounting treatment of goodwill has been the subject of discussions for decades. The
IASB is currently debating whether and what changes are needed to the accounting for
goodwill and impairment tests in the context of the post-implementation review of IFRS 3
Business Combinations.
ES2 In 2014, a Research Group of EFRAG, Organismo Italiano di Contabilità (OIC) and
Accounting Standards Board of Japan (ASBJ) issued a Discussion Paper on accounting
and disclosure requirements on goodwill to contribute to the debate. Following the replies
from constituents and publication of a feedback statement, EFRAG concluded that it would
be helpful to collect data on the amount and trend of goodwill and impairment.
ES3 This study presents a quantitative analysis of a sample of 328 European companies from
2005 to 2014. Its objective is to facilitate the debate related to the accounting for goodwill
by providing evidence on how goodwill and goodwill impairment have evolved over time.
ES4 The purpose of the study is not to draw conclusions from the data presented and EFRAG
does not take a position on the accounting treatment of goodwill. EFRAG acknowledges
that this type of quantitative study has a number of limitations. However, the study includes
suggestions to relate the main findings to the debate around goodwill. The study should be
understood in this context.
ES5 Chapter 1 provides some background information about EFRAG’s proactive project
Goodwill impairment and amortisation, summarises the feedback received so far and
explains in more detail the scope, objective and structure of the study.
ES6 Chapter 2 illustrates the data on amounts, trends, concentration of goodwill and
impairments reported by a sample of 328 European companies. Chapter 2 also explains
the constraints and limitations of this study.
ES7 Chapter 3 compares the sample of 328 European companies to samples of companies in
the US, Australia and Japan. The companies in the Japanese sample apply Japanese
GAAP, which requires goodwill to be amortised. This part of the study was carried out in
collaboration with the ASBJ.
Goodwill and impairment requirements under IFRS
ES8 IFRS 3 sets out the requirements to account for business combinations transactions where
an acquirer obtains control of one or more businesses. Business combinations are
accounted for using the 'acquisition method', which generally requires assets acquired and
liabilities assumed to be measured at their fair values at the acquisition date. Goodwill is
recognised as the difference between the consideration transferred and the acquirer’s share
of identifiable net assets acquired.
ES9 Goodwill is not subject to annual amortisation, but is carried at its original amount less any
accumulated impairment losses calculated under IAS 36 Impairment of Assets. Goodwill
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should be tested for impairment at least annually. Under IAS 36, goodwill is allocated to
cash-generating units (CGUs) and the recoverable amount of a CGU is calculated as the
higher of value in use and fair value less costs to sell.
ES10 Value in use and fair value are distinct in the sense that value in use is based on the entity’s
perspective and fair value in based on the market participants’ perspective. This study
includes a number of references to market capitalisations. Market capitalisations are fair
value measures; value in use may differ from market capitalisations.
Highlights of the European data
ES11 Chapter 2 of this study presents the quantitative analysis for a sample of 328 European
companies. The highlights of this part of the study are as follows:
a)
Evolution of goodwill: From 2005 to 2014 the total amount of goodwill recognised
increased from 935 billion euros to 1 341 billion euros, with an increase of 43%1.
Changes in goodwill from 2006 to 2014 (in billion euros)
2006
2007
2008
2009
2010
2011
2012
2013
2014
200
1 600
150
1 182
1 204
1 232
1 316
1 329
1 296
1 244
1 341
1 200
1 004
100
50
187
91
1 000
97
78
112
80
48
0
-23
-9
20
-9
-55
800
600
-15
-20
-12
-67
-53
-44
-50
-100
1 400
400
200
Goodwill impairment
Goodwill acquisition and other changes
Goodwill balance
0
b)
Concentration of goodwill: A small number of companies account for a large share
of the carrying amount of goodwill. The level of concentration has been decreasing
slightly over time;
c)
Goodwill to total assets: The ratio has remained fairly stable over the years at
approximately 3.7%. The ratio is significantly higher when entities in Financials
industry are excluded from the total. The ratio excluding Financials decreased
gradually from 19.5% in 2009 to 16.6% in 2014;
In the graph, ‘goodwill acquisition and other changes’ include acquisitions, disposals and foreign
currency translation effects.
1
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d)
Goodwill to net assets (or equity): The ratio has been decreasing since 2008, but
it was still significant in 2014 (29%);
e)
Impairment losses: The amount of impairment losses recognised was at the highest
level in 2008 and 2011, years when the performance of the financial markets was
negative. On average, impairment losses represented 2.7% of the opening balance
of goodwill. Although in 2012 the financial markets were already showing signs of
recovery, the level of impairments in 2012 were similar to 2008;
f)
Concentration of goodwill impairments: Impairment losses are significantly
concentrated in a small number of companies, particularly in the Telecommunications
and Financials industries;
g)
Breakdown by industry: Absolute and relative levels of goodwill and impairment
losses vary significantly across industries. The carrying amount of goodwill increased
for most industries but decreased for Telecommunication Services. The ratios
goodwill over total assets and goodwill over net assets also vary across industries,
with Telecommunication Services and Consumer Staples being the leaders. The
industries with the bigger impairments are Telecommunication Services, Financials
and Materials.
Highlights of the international comparison
ES12 Chapter 3 compares the sample of 328 European companies to samples of companies in
the US, Australia and Japan (as indicated above, companies included in the Japanese
sample amortise goodwill annually). The main highlights of this part of the study are as
follows:
a)
Evolution of goodwill: From 2005 to 2014, the total amount of goodwill increased
across all indices. US and Europe had larger total and average per company amounts
of goodwill than Japan and Australia;
b)
Concentration of goodwill was a common feature of all indices;
c)
Goodwill as a percentage of net assets: US and Europe showed higher ratios of
goodwill to net assets than Australia and Japan;
d)
Goodwill as a percentage of market capitalisation: The ratio goodwill to market
capitalisation showed more volatility during the period in all indices, due to the volatility
in the market capitalisation;
d)
Market capitalisation vs net assets: For US and Europe, market capitalisation was
significantly higher than the carrying amount of equity. The difference for Japan was
much lower;
e)
Goodwill impairment losses were high in 2008 for Europe and US, and again in
2011 and 2012 mainly for Europe and Australia. For US and Europe, impairment
losses ranged from 1%-5% of the opening balance of goodwill for the period. The ratio
for Japan, including goodwill amortisation, was between 10% and 14%. A relatively
small number of companies recorded impairment losses. The percentage was higher
for Europe than the other indices; and
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f)
Industry analysis: Telecommunication Services, Consumer Staples and Healthcare
industries reported higher ratios of goodwill to net assets. Industrials in US and
Europe also showed higher figures. Australia ranked higher in some industries,
particularly Information Technology industry. Consumer Staples and Healthcare
industries in Japan showed relatively higher figures compared to other industries.
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QUESTIONS TO CONSTITUENTS
EFRAG invites comments on all matters in this quantitative study, particularly in relation to the
questions set out below. Comments are more helpful if they:
a)
address the question as stated;
b)
indicate the specific paragraph reference, to which the comments relate; and/or
c)
describe any alternative approaches EFRAG should consider.
All comments should be received by 31 December 2016. Suggestions will be duly considered by
EFRAG in its discussion about future IASB proposals on the accounting for goodwill.
Question 1 – Has this study helped you?
In recent years, there have been calls that standard setting should be more evidence based.
Contrary to other EFRAG past proactive publications, this quantitative study does not include
proposals or positions in relation to accounting requirements. Its main objective is to assist
readers to reach an evidence-based conclusion on the issues.
Do you consider this type of quantitative study helpful to reach more evidence-based
conclusions on accounting issues? If not, are there other types of evidence that you
would consider more helpful?
Question 2 – How could this study be improved?
In developing the quantitative study, EFRAG made decisions about the sample size, the type of
analysis (for instance, in relation to the ratios used) and the level of detail.
Which aspects of the study did you find the most useful or the least useful and why?
Are there additional analysis that you would consider useful, and why?
What do we really know about Goodwill and Impairment?
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Chapter 1: Why are we publishing this quantitative study?
What have EFRAG and the IASB been doing on goodwill and
impairment?
1.1
In March 2004, IFRS 3 Business Combinations changed the accounting requirements
for goodwill and introduced an impairment-only model with no annual amortisation. This
standard replaced the previous amortisation-based model required by IAS 22 Business
Combinations.
1.2
In January 2008, the IASB issued a revised version of IFRS 3. Although some potentially
significant differences remained, the publication of IFRS 3 led to a higher degree of
convergence between IFRS and US GAAP in the accounting for business combinations.
1.3
In 2012, EFRAG and the OIC initiated a project aiming to provide early input and an indepth analysis to the IASB Post-Implementation Review (the 'PIR') on IFRS 3. The OIC
and EFRAG conducted a public consultation in July 2012. The results of the survey
indicated that information on goodwill was used in different ways and that there were
diverging views on how to measure goodwill after initial recognition.
1.4
EFRAG, the OIC and the ASBJ formed a Research Group to carry out the research on
this area. The research outcome was published in July 2014 in a form of the Discussion
Paper (DP). Following the replies from constituents and the publication of a feedback
statement, in January 2015 the EFRAG board agreed that work should be continued on
the project, in particular on identifying potential improvements to the impairment model.
1.5
In June 2015, the IASB published its report and feedback statement on its PIR of IFRS 3.
The report identified that many respondents thought that the impairment test was
complex, time-consuming and expensive and involved significant judgements. In
addition, investors identified shortcomings in the information provided to them (e.g.
timing of impairments).
1.6
To address these concerns, the IASB added a research project to its agenda that
considers how to address the following three areas of focus:
1.7
a)
whether changes should be made to the existing impairment test for goodwill and
other non-current, non-financial assets;
b)
subsequent accounting for goodwill (including the relative merits of an impairmentonly approach and an amortisation and impairment approach); and
c)
the extent to which other intangible assets should be separated from goodwill.
In the context of this process, EFRAG decided that it would be helpful to collect
quantitative data on goodwill and impairment. As the ASBJ was conducting a similar
analysis for companies outside Europe, EFRAG and the ASBJ decided to develop their
quantitative analysis together.
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The impairment-only model for goodwill
1.8
There has been a long debate about the strengths and weaknesses of an impairmentonly model and whether the amortisation of goodwill should be reintroduced. The debate
encompasses both conceptual arguments about the relevance of information and
implementation issues. Many academic studies have investigated different aspects of
goodwill accounting. While some single country studies support the relevance of
impairment losses, there is no conclusive evidence of whether the impairment-only
model provides timely and reliable results, or more decision-useful information.
1.9
Most respondents to the DP published in 2014 agreed with its main conclusion that the
impairment-only model for acquired goodwill did not provide the most appropriate
solution for subsequent measurement of goodwill. In contrast, a minority of respondents,
mostly users, were supportive of the current impairment-only approach. These
respondents explained that the amortisation model was fairly meaningless and would not
be beneficial to users of financial statements.
1.10
As summarised in the EFRAG feedback statement published in 2015, those in favour of
the reintroduction of amortisation of goodwill argue that:
1.11
a)
Goodwill amortisation allows matching of the consumption of goodwill with the
benefits of the transaction;
b)
Amortisation limits the recognition of internally generated goodwill;
c)
There are significant uncertainties and judgements inherent in the impairment-only
model and amortisation can provide sufficient verifiability and reliability of financial
information;
d)
Impairment is not usually recognised on a timely basis and thus does not provide
predictive information to markets;
e)
Amortisation is a more operational approach and improves the cost-benefit
balance for reporting entities; and
f)
Amortisation limits the size of goodwill in relation to total assets.
However, those against the reintroduction of amortisation of goodwill argue that:
a)
Impairment losses, even when late, provide confirmatory information;
b)
An impairment-only approach is more conducive to the assessment of stewardship
and of the ability of the management to add value through their acquisitions;
c)
Annual amortisation is conceptually flawed since nearly all acquisitions are based
on the intention to continue the acquired activities for an indefinite period;
d)
A reliable assessment of the useful life of goodwill would also involve significant
judgment; and
e)
Users would ignore amortisation and use earnings figures that exclude it (although
they may also exclude impairment losses).
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1.12
Many respondents considered that the impairment-only approach was a challenge in
practice and that there was room to improve the guidance in IAS 36. These respondents
identified a number of difficulties related to the current approach and provided some
suggestions on what should be improved.
Objective and structure of the quantitative study
1.13
1.14
The objective of this quantitative study is to facilitate the debate related to the accounting
for goodwill by providing evidence on how goodwill and goodwill impairments have been
evolving over time. In particular, the study presents data on:
a)
The evolution over time (2005-2014) of the amount of goodwill and goodwill
impairments;
b)
The evolution of the relative weight of goodwill when compared to other elements
of the financial statements, such as total assets and equity;
c)
The degree of concentration of goodwill, and concentration and frequency of
impairment losses;
d)
The evolution of goodwill and impairment losses when compared to market
capitalisation;
e)
A breakdown of the overall data by industry; and
f)
The relationship between the nature of the consideration paid and the proportion
of the consideration allocated to goodwill for sixty recent acquisitions from various
industries.
The study is not meant to draw conclusions from the data presented and does not include
recommendations on the accounting treatment of goodwill. Some have suggested that
other intangible assets with indefinite useful lives acquired in business combinations
present the same issues as goodwill. The study does not address them, as separate
data could not be obtained. Nor does the study address negative goodwill, as the
feedback did not show significant concern over it.
Limitations inherent to this type of study
1.15
There are inherent limitations to this type of quantitative study. In particular:
a)
The sample is not statistically representative of all European listed entities;
b)
The study is based on a relative short time frame of past data which many not be
a reliable indicator of future developments;
c)
The study is based on the data included in the commercial database, which have
not been systematically verified with the financial statements; and
d)
The level of concentration means that averages may have a limited relevance. To
overcome this limitation, the study includes measures of relative standing such as
percentile ranking and classes.
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1.16
Finally, EFRAG does not consider that a quantitative study can provide undisputed
evidence to decide what the accounting treatment should be, or whether the current
requirements have achieved their objectives. EFRAG considers that quantitative data
are helpful background information to assist standard-setters and other interested parties
to reach more evidence-based conclusions.
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Chapter 2: European data
Definition of the sample
2.1
EFRAG used two data aggregators to collect direct financial information on European
listed companies, the S&P Capital IQ database and FactSet. The study focused on S&P
Europe 350 Index companies, for the period between 2005 and 2014. The index includes
350 leading blue-chip companies from 16 European countries.
2.2
EFRAG performed the analysis using the population of companies that constituted the
S&P Europe 350 index as of March 2016. EFRAG made some adjustments to the data,
such as removing some companies for which data were missing in some years or a subgroup was already included at the parent company level. The final sample includes 328
companies (“the sample”), with a market capitalisation of approximately 6 trillion euros.
2.3
Accounting data were translated into euros using the historical exchange rate by the
commercial database. The industry classification used in our presentation is based on
the Global Industry Classification Standard (GICS).
Goodwill
Evolution of goodwill
2.4
From 2005 to 2014 the total amount of goodwill increased from 935 billion euros to 1 341
billion euros. The rate of growth has not been constant, and in some years there was a
net decrease.
2.5
The graph below illustrates the evolution of goodwill from 2005 to 2014. The changes in
goodwill include new acquisitions, disposals, impairment losses and foreign currency
translation effects.
Evolution of goodwill from 2005 to 2014 (in billion euros)
1 400
1 300
+1.9%
1 182
1 200
+2.3%
+1.0%
-2.5%
+6.8% 1 316
1 329
1 296
1 232
-4.0% +7.8%1 341
1 244
1 204
+17.8%
1 100
+7.3%
1 000
935
1 004
900
800
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
GW S&P Europe 350 Index
What do we really know about Goodwill and Impairment?
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2.6
From 2005 to 2011, the total amount of goodwill progressively increased by 43%. From
2012 to 2013 there was a decrease of 4% due to the combined effect of significant
amounts of impairments and a decrease in additions to goodwill.
2.7
In 2014 the total amount of goodwill reached its highest level, amounting to 1 341 billion
euros. This increase was related to significant additions of goodwill combined with lower
amounts of impairments (35 companies account for 80% of the additions).
2.8
The following chart compares the trend of goodwill to the trend in market capitalisation,
net assets and Gross Domestic Product (GDP). The market capitalisation fluctuated
widely from 2005 to 2014, with sharp decreases in 2008 (41%) and 2011 (11%). While
goodwill also fluctuated from 2005 to 2014, it showed a different trend and a lower level
of volatility. In particular, decreases on the total amount of goodwill only occurred in 2012
and 2013, when financial markets were already showing signs of recovery.
2.9
From 2005 to 2014 the GDP at market prices of Euro area 19 (fixed composition)
increased 19%. From 2005 to 2007, it gradually increased by 11% in total. In 2008 and
2009, it decreased approximately 2% but subsequently the GDP recovered 27% until
2014.
Evolution of Goodwill, Market Capitalisation and Net Assets
and GDP (in billion euros, GDP in million euros)
8 800
7 917
7 800
7 042
7 258
2 100
6 430
6 800
6 025
6 207
1 900
5 539
5 626
5 800
4 866
4 252
4 800
4 383
4 531
4 533
1 500
3 579
3 800
3 345
3 020
1 316
2 721
2 800
2 152
935
2 275
1 182
1 204
2 390
2 381
1 329
1 341
1 296
1 232
2 338
2 414
2009
2010
2 455
2 459
1 244
2 501
1 300
2 551
1 100
1 004
800
900
2005
2.10
1 700
4 264
3 745
1 800
2 300
7 594
2006
2007
2008
2011
2012
2013
2014
Market Capitalisation
Net assets
GDP (source: European Central Bank)
Goodwill S&P Europe 350 Index
Goodwill represents the biggest portion of intangible assets, being on average 62% of
the total. The rest of the study focuses on goodwill alone.
What do we really know about Goodwill and Impairment?
16
Trend of goodwill as a percentage of total assets
2.11
The chart below shows that the ratio of goodwill to total assets is relatively stable since
2005 for the companies with goodwill in the sample and averaged 3.7%.
2.12
Entities in the Financial industry have typically very large balance sheets and their ratio
averages only 0.9%. If Financials are excluded, the ratio becomes significantly higher
and fluctuates between 13.5% and 19.5%. The adjusted ratio started to decrease in 2009
and it stabilised at 16.6% in 2014. Although the total amount of goodwill has been
increasing over the years, its relative weight has been slightly decreasing from 2009 to
2013.
Goodwill over total assets (companies with goodwill)
25.0%
18.9%
20.0%
19.5%
18.7%
14.9%
15.0%
13.7%
13.5%
3.5%
3.3%
3.7%
3.8%
4.0%
2005
2006
2007
2008
2009
17.7%
16.9%
16.4%
16.5%
3.7%
3.5%
10.0%
5.0%
4.0%
3.7%
3.6%
0.0%
2010
2011
2012
2013
2014
Goodwill / Total Assets (companies with GW)
Goodwil / Total Assets excl. the Financials (companies with GW)
2.13
A significant number of companies have a ratio of goodwill to total assets of less than
5%. When entities in the Financials industry are excluded, most of the other companies
have a ratio higher than 10%. The following table presents the distribution of the ratio for
the companies that presented goodwill in each year.
Number of companies
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
127
119
104
106
103
110
102
103
105
112
Between 5% and 10%
35
34
38
35
31
32
37
35
38
36
Between 10% and 20%
59
66
59
57
60
56
62
65
63
63
More than 20%
74
79
88
93
96
99
98
92
94
95
295
298
289
291
290
297
299
295
300
306
Less than 5%
Total
What do we really know about Goodwill and Impairment?
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Trend of goodwill as a percentage of net assets
2.14
From 2005 to 2014 the ratio of goodwill to net assets, or the book value of equity,
averaged 34% for companies with goodwill (see table in paragraph 2.19 below). The
ratio has been decreasing since 2008 and reached its lowest point in 2014 with 29%.
2.15
The ratio excluding entities in the Financials industry is significantly higher and fluctuates
between 42% and 60%. This adjusted ratio has also been decreasing since 2008 and it
stabilised at 48% in 2014.
Goodwill over net assets (companies with goodwill)
70.0%
60.2%
57.8%
60.0%
50.0%
52.0%
50.1%
43.5%
43.1% 42.2%
48.4% 45.6%
47.5%
40.0%
30.0%
36.2%
39.2%
36.0%
35.5%
35.7%
33.0%
32.1% 30.6%
29.4% 28.8%
20.0%
10.0%
0.0%
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Goodwil / Net Assets (companies with GW)
Goodwil / Net Assets excl. the Financials (companies with GW)
2.16
The following table presents the distribution of the ratio for the companies that presented
goodwill in each year. Most of the companies are below 30%, but a significant share
exceeds 80%.
Number of companies
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
1
3
4
4
3
3
3
4
5
3
Between 0% and 30%
148
143
138
124
129
139
139
138
142
144
Between 30% and 50%
45
47
36
47
48
55
53
48
53
52
Between 50% and 80%
39
44
48
40
38
41
43
50
47
46
Greater than 80%
62
61
63
76
72
59
61
55
53
61
295
298
289
291
290
297
299
295
300
306
Negative ratio (negative
net assets)
Total
What do we really know about Goodwill and Impairment?
18
2.17
EFRAG does not have data on the ratio between goodwill and total consideration paid in
the period. The European Goodwill Impairment Study by Houlihan Lokey reports that
goodwill recognised between 2007 and 2011 by companies within the STOXX Europe
600 index represented 45% of the total consideration. In its review of 2012 IFRS financial
statements, ESMA found that for a sample of 56 entities, goodwill had been recognised
in 85% of the acquisitions and represented 54% of the total consideration.
Level of concentration of goodwill
2.18
Over the whole period, goodwill remained highly concentrated in a small number of
companies. The 50 companies with the highest amount of goodwill (Top 50) account for,
on average, 64% of the total goodwill. The same companies represent 38% of the market
capitalisation and 42% of the net assets in the sample.
Concentration of goodwill for S&P Europe 350 Index (in billion
euros)
1 600
1 400
1 200
1 000
Total recognised by the sample companies
800
600
Goodwill recognised by the 50 companies with
highest goodwill
400
200
0
2005
2006
2007
2008
2009
2010
Goodwill in 50 companies
2.19
2011
2012
2013
2014
Goodwilll in 278 companies
The share of the top 50 decreased from 69% in 2005 to 61% in 2014. This is partially
due to an increase of the percentage of companies in the sample that report goodwill, as
shown in the table below.
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Companies in the
sample
328
328
328
328
328
328
328
328
328
328
Companies reporting
goodwill
295
298
289
291
290
297
299
295
300
306
In %
90%
91%
88%
89%
88%
91%
91%
90%
91%
93%
Concentration in Top
50 companies
69%
66%
65%
63%
64%
63%
61%
62%
62%
61%
24
28
29
31
31
32
34
35
35
36
Companies
accounting for 50% of
total goodwill
What do we really know about Goodwill and Impairment?
19
% of market cap
represented by these
companies
22%
25%
26%
29%
29%
29%
28%
28%
28%
29%
% of net assets
represented by these
companies
27%
30%
31%
33%
34%
35%
32%
31%
29%
28%
How could the data be used in the debate?
2.20
The data about the absolute and relative amount of goodwill could help in assessing if
the impairment-only model has contributed to an excessive growth of the balance of
recognised goodwill.
2.21
The data on the trend of the balance – in a period characterised by two financial crises
- could help in assessing if the impairment-model is working as expected.
2.22
The information about consideration allocated to goodwill could help in assessing if
the purchase price allocation requirements are meeting their expected objectives.
2.23
The data on the concentration of goodwill may help in assessing the pervasiveness of
goodwill. If goodwill is pervasive, this may support the call for a simplification of the
requirements.
Goodwill impairment losses
Evolution of goodwill impairment losses
2.24
The amount of goodwill impairment losses per year for the companies within the sample
has fluctuated over the years, with the highest amounts of total impairment recognised
in 2008 (55 billion euros) and 2011 (67 billion euros), years in which the market
capitalisation of these companies fell significantly.
2.25
The graph below shows that goodwill impairment losses generally tend to be higher when
financial markets are negative and lower when they are positive. In addition, after the
2011 peak, impairment losses have been gradually decreasing and in 2014 almost
reached the low levels of 2007. However, the level of impairments in 2012 were still high
even though the financial markets were already showing signs of recovery.
What do we really know about Goodwill and Impairment?
20
Evolution of goodwill impairments compared to market
capitalisation of all companies (in billion euros)
9 000
100
90
80
7 594
7 042 7 258
6 430
6 025
5 626
70
6 000
5 000
67
50
44
41
20
20
10
2006
2007
15
12
9
2005
3 000
2 000
23
0
4 000
53
55
40
8 000
7 000
6 207 5 539
4 252
60
30
7 917
1 000
0
2008
2009
2010
2011
2012
Goodwill Impairments S&P Europe 350 Index
2013
2014
Market Capitalisation
Intensity of goodwill impairment
2.26
As noted above, impairment losses peaked in 2008 and 2011, years in which the market
capitalisation fell significantly. The intensity of impairments can be measured by the ratio
of impairment over the opening balance of goodwill.
2.27
The following chart illustrates the trend of the ratio. This ratio ranged from approximately
1% (in 2007, 2010 and 2014) to approximately 4.9% (in 2008 and 2011). On average,
entities in the sample recognised an annual impairment of 2.7% of the opening goodwill.
When entities in the Financials industry are excluded, the average ratio is 12%.
Impairment over prior year goodwill
(% of the goodwill impaired each year)
6.0%
5.1%
4.7%
5.0%
4.0%
4.0%
3.0%
3.0%
2.0%
1.0%
1.7%
2.4%
0.9%
2.8%
0.7%
0.0%
2006
2007
2008
2009
1.2%
3.7%
1.0%
1.4%
3.4%
3.1%
2.6%
1.1%
2010
0.9%
2011
2012
2013
2014
Goodwill impairment / Goodwill Prior year
Goodwill impairment / Goodwill Prior year (excl. the financials)
2.28
Over the period, companies recognised on average impairments equal to 2.7% of their
total goodwill (opening balance). The average takes into account two significant declines
in the market capitalisation (2008 – 2011) and are affected by a limited number of
impairment events, as shown by the data on the concentration of impairments.
What do we really know about Goodwill and Impairment?
21
2.29
The distribution of the ratio shows that in each year the majority of companies reporting
goodwill did not recognise any impairment. Some companies recognised cumulative
losses equal to more than 80% of their goodwill.
Ratio impairment /
prior year goodwill
2006
2007
2008
2009
2010
2011
2012
2013
2014
222
230
191
207
220
220
212
206
216
Between 0% and 3%
56
46
51
43
49
39
46
53
48
Between 3% and 5%
5
4
11
4
7
6
5
9
7
Between 5% and
10%
4
8
11
14
6
6
6
13
11
Between 10% and
80%
3
6
21
20
4
25
24
12
14
Greater than 80%
5
4
4
3
4
1
6
2
4
295
298
289
291
290
297
299
295
300
No impairment
Total
2.30
It may be indicative to compare the ratio of market capitalisation to net assets. IAS 36
lists a negative difference between market capitalisation and the carrying amount of
equity as an indicator of impairment. When an entity is a single CGU reporting goodwill,
this situation results in an impairment loss unless the value in use proves to be higher.
2.31
The chart below illustrates the trend of the market-to-book ratio. The ratio was at its
lowest levels in 2008 and 2011, despite the significant impairment losses that were
recorded in those 2 years, and subsequently recovered mainly due to gains in the stock
market.
Market-to-book ratio and goodwill impairments (goodwill
impairments are in billion euros)
100
2.21
2.33
2.50
2.03
90
1.68
80
1.50
1.27
70
1.46
1.26
1.63
1.42
1.40
60
50
67
55
53
40
30
44
41
20
23
10
20
0
2005
2006
2007
15
12
9
0.30
-0.80
2008
2009
2010
2011
Goodwill Impairments S&P Europe 350 Index
What do we really know about Goodwill and Impairment?
2012
2013
2014
Market-to-book ratio
22
Number of
companies with
market-to-book
ratio < 1
2.32
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
22
20
35
114
80
76
112
90
64
66
Other studies made this comparison. The 2012 study from Houlihan Lokey noted that in
2011 more than a third of the companies in the Euro STOXX 600 had a ratio below 1,
and most of the industries had lower ratios than in 2007. In its review of the 2011 annual
IFRS financial statements, ESMA noted that 43% of a sample of 235 European listed
entities showed a ratio below 1, but only half of those recognised impairment losses in
that year.
Timing of impairments
2.33
As already noted in paragraph 2.26 above, higher goodwill impairments tend to occur
when financial markets are negative and vice-versa.
2.34
In addition, EFRAG has analysed whether companies tend to recognise impairment
losses only when they have negative pre-impairment net results (i.e. before considering
impairments of goodwill). The following table shows that the vast majority of the
companies reporting impairment had a positive pre-tax result before impairment.
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Number of
companies
reporting goodwill
impairment
78
73
68
98
84
70
77
87
89
84
Number of
companies with a
negative result
before impairment
5
1
3
17
14
3
10
12
10
8
6%
1%
4%
17%
17%
4%
13%
14%
11%
10%
In %
2.35
When considering companies that had impairment losses from 2005 to 2014, only 10%
of these companies (on average) had negative results before making goodwill
impairments. Therefore, this shows that impairment losses are not only recognised by
loss-making companies.
2.36
However, it should be noted that impairment losses need to be determined at the CGU
level, and that the CGU may not be bigger than a reporting segment. It is possible that
some entities that were reporting a net profit were experiencing losses in the CGU to
which the goodwill was allocated.
Level of concentration of impairments
2.37
Impairment losses are highly concentrated in a small number of companies. On average,
27% of companies in the sample reported impairments and those impairments are highly
concentrated in a limited number of companies (top 10). Even so, this concentration
decreased significantly in 2014.
What do we really know about Goodwill and Impairment?
23
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Companies with
goodwill
295
298
289
291
290
297
299
295
300
306
Companies that
reported goodwill
impairments
78
73
68
98
84
70
77
87
89
84
% of companies
with goodwill
impairment
26%
24%
24%
34%
29%
24%
26%
30%
30%
28%
% of goodwill
impairment
recognised by top
10
95%
95%
76%
77%
61%
80%
76%
72%
81%
57%
Concentration of goodwill impairments (in billion euros)
100
90
80
70
60
50
40
30
20
10
0
98
84
78
2005
73
2006
68
2007
70
2008
2009
2010
87
89
2012
2013
84
77
2011
100
90
80
70
60
50
40
30
20
10
0
2014
Impairments made by remaining companies
Top 10 impairments
Number of companies with goodwill impairments
2.38
In addition to this concentration, EFRAG has also observed that some companies have
continuously recognised impairments in this 10-year period. For example, during this
period, 50 companies have presented at least 6 years of goodwill impairment losses.
Furthermore, these companies recognised, on average, 70% of the total impairment
amounts recognised by the companies included in our sample each year.
2.39
By contrast, 72 companies of our sample did not recognise any goodwill impairment
losses in the 10-year period under observation.
2.40
Other studies reported similar findings in relation to the concentration of impairment. The
2012 Houlihan Lokey study noted that more than 70% of total goodwill impairments in
2011 were booked by just two industries, banks continued to grapple with ongoing
regulatory and macroeconomic uncertainties and telecoms witnessed increasingly
challenging trading conditions.
What do we really know about Goodwill and Impairment?
24
2.41
In its review of 2011 financial statements, ESMA noted that a limited number of
companies accounted for significant impairment losses. 5% of the companies in the
sample of 235 listed entities reviewed accounted for almost 75% of the goodwill
impairment and were mostly in financial services and telecommunications.
How could the data be used in the debate?
2.42
The ratio between impairment losses and amount of goodwill could help in assessing
the adequacy of impairment.
2.43
The evolution of impairment losses and the data on impairment recognition and preimpairment losses could help in assessing the timeliness of impairment.
2.44
The comparison between the market capitalisation and the carrying amount of equity
could help in understanding how the market perceives impairment losses.
2.45
The data on the concentration and distribution of impairment losses could help in
assessing how effectively impairment requirements are applied.
Trends in 2015
2.46
This study was developed in the early months of 2016, before the 2015 financial
statements were available in the commercial database. For reference, the following are
the key figures for the sample of 328 European companies in 2015:
a)
307 companies reported goodwill. Goodwill amounted 1 397 billion euros, with an
increase by 56 billion euros, or 4.2%. This net increase includes 33 billion euros of
impairment and 89 billion euros of acquisitions and other changes of goodwill;
b)
The ratio of goodwill to total assets amounted to 3.6% and the ratio of goodwill to
net assets amounted to 29.1%, both presenting a slight increase since 2014;
c)
93 out of the 307 companies which reported goodwill recognised impairment
losses. The total amount of goodwill impairments reported in 2015 by the
companies within the sample amounted to 33 billion euros, equal to 2.5% of prior
year goodwill.
Industry analysis
2.47
In the following paragraphs, the study breaks down some of the analysis of the sample
at the industry level.
Evolution of goodwill by industry
2.48
The following chart shows the evolution of the total amount of goodwill by industry, as
well as the number of companies analysed in each industry.
What do we really know about Goodwill and Impairment?
25
Evolution of total goodwill by industry (in billion euros)
350
69
14
64
30
19
52
34
18
15
13
Energy
IT
300
250
200
150
100
50
0
Financials
Telcos
2005
Cons. Industrials
Staples
2006
2007
2008
Cons.
Discr.
2009
Utilities Healthcare Materials
2010
2011
2012
2013
2014
Goodwill over total assets by industry
2.49
The ratio of goodwill over total assets ranges from 0.9% to 26.4% (average: 3.7%).
Consumer Staples, Telecommunication Services and Healthcare report the highest
ratios, while Financials, Energy, and Utilities report the lowest.
Goodwill over total assets by industry (companies with goodwill)
35.0%
30.0%
25.0%
average excl.
financials: 16.7%
20.0%
15.0%
10.0%
average:
3.7%
5.0%
0.0%
Telcos
Cons. HealthcareIndustrials
Staples
2005
2006
2007
2008
Cons.
Discr.
2009
Materials
2010
Utilities
2011
2012
IT
2013
Energy Financials
2014
Goodwill over net assets by industry
2.50
The ratio of goodwill over net assets also varies significantly, with a range from 6.8% to
71.6% (average: 33.6%). The three industries with the highest ratios are
Telecommunication Services, Consumer Staples and Industrials, while those with the
lowest ratios are Energy, Financials and Materials.
What do we really know about Goodwill and Impairment?
26
Goodwill over net assets by industry (companies with goodwill)
90.0%
80.0%
70.0%
average excl.
financials: 49.1%
60.0%
50.0%
40.0%
30.0%
average:
33.6%
20.0%
10.0%
0.0%
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Goodwill impairment intensity by industry
2.51
The ratio of impairment losses ranges from 0.1% to 5.1% (average: 2.7%).
Telecommunication Services, Materials and Financials report the highest ratios, and
Healthcare, Consumer Staples and Energy report the lowest.
Goodwill impairment over goodwill of prior year by industry
(% of goodwill impaired each year)
16.0%
14.0%
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
Average:
2.7%
2006
2.52
2007
2008
2009
2010
2011
2012
2013
2014
As mentioned above, there is a high concentration of goodwill impairment charges in a
few companies of our sample. In 2008, 50% of the total impairment losses were
recognised by two entities in Financials and one in Telecommunication Services; in 2011,
What do we really know about Goodwill and Impairment?
27
the same percentage was recognised by two entities in Financials, two in
Telecommunication Services and one in Materials.
Industry focus
2.53
2.54
Given the diversity of ratios across the industries, an analysis at this level is likely to
provide more information than economy-wide averages. The following paragraphs
present a high-level analysis of three Industries, Telecommunication Services,
Healthcare and Information Technology, selected on the basis of their specific features:
a)
Telecommunication Services industry has the highest amount of goodwill in
absolute and relative terms (14 companies);
b)
Healthcare industry has experienced a significant growth of goodwill and low
impairment intensity (18 companies); and
c)
Information Technology industry has a high ratio of goodwill over total assets and
a relatively low impairment intensity (13 companies).
However, EFRAG acknowledges that a detailed, year-by-year analysis of each industry,
would be required to fully investigate the relation between the accounting data and the
economic trends.
Telecommunication Services
2.55
The following graph illustrates the changes in goodwill for the industry. The overall
balance decreased by 26% between 2005 and 2014, mostly due to impairment losses
recognised in the period. Goodwill acquisitions and other changes are negatively
impacted by foreign exchange, in particular due to 25% drop in the UK pound between
2007 and 2010.
What do we really know about Goodwill and Impairment?
28
Telecommunication Services - Goodwill evolution from 2006 to
2014 (in billion euros)
2006
2007
204
213
2008
2009
2010
2011
2012
2013
2014
30
250
197
20
10
205
184
0
200
157
23
12
8
-3
-11
-10
199
-6
150
143
12
-2
-6
150
8
0
-6
-6
100
-20
-8
-19
-5
-21
50
-20
Goodwill impairment
-30
0
Goodwill acquisitions and other changes
Goodwill balance
Goodwill in
billion euros
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
202
204
213
197
199
205
184
157
143
150
2.56
The sample includes 14 companies, and on average,13 of them report goodwill. The
ratio of goodwill to total assets averaged 26% over the period, and goodwill to net assets
averaged 72%. Both decreased over the period, from 28% to 21%, and 74% to 60%,
respectively.
2.57
On average over the period, 9 companies (68%) had goodwill greater than 50% of their
net assets and 3 companies (22%) had goodwill greater than 100% of their net assets;
for one of these, goodwill also exceeded the market capitalisation.
2.58
Goodwill impairment losses per year have significantly fluctuated, with the highest losses
recognised in years 2005, 2012, 2006 and 2011. On average over the period, losses
amounted to 5% of the opening goodwill.
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Companies
with goodwill
impairment
7
8
7
8
6
6
7
8
6
4
Goodwill
impairment
amount in
billions euros
37
20
3
5
6
6
19
21
8
0
What do we really know about Goodwill and Impairment?
29
2.59
The next chart compare goodwill impairment to market capitalisation of the companies
in the industry.
Telecommunication Services - Evolution of goodwill
impairment and market capitalisation (in billion euros)
40
568
446
35
600
494
500
30
356
25
20
392
404
426
369
391
325
400
300
37
15
200
20
10
19
21
100
5
0
2005
2006
3
5
6
6
2007
2008
2009
2010
8
0
0
Goodwill impairment
2011
2012
2013
2014
Market capitalisation
2.60
The market capitalisation of the industry fluctuated significantly from 2005 to 2014.
Specifically, in 2008, the market capitalisation of the companies in the sample
experienced a dramatic decrease (partially due to the drop in the UK pound) but 11 of
13 companies recognised an impairment loss of 2% or less of the opening goodwill. It is
however interesting to note that some of the companies whose market capitalisation
dropped between 30% and 45% reported operating profits, earnings before tax and cash
flows from operating activities in line or slightly better than in 2007.
2.61
In 2011 and 2012, 4 of the 5 companies with the highest goodwill balance reported a
total 36 billion euros of impairment losses, which amounted to approximately 25% of their
goodwill at the end of 2010. The other company in the top 5 recognised losses equal to
1.4% of its goodwill at the end of 2010. However, its total goodwill still decreased of
approximately 5.2 billion euros between 2012 and 2013 due to foreign exchange and
hyperinflation adjustments and reclassification to operations to be disposed of.
2.62
The European telecommunication services sector experienced a 4-year period of
consecutive decline of aggregated revenues between 2009 and 2012, due to general
market conditions, the impact of regulations that cut roaming and termination rates and
fierce competition among rival groups.
Healthcare
2.63
Goodwill increased by 173% between 2005 and 2014, mostly due to new acquisitions.
For a number of individual combinations, the acquirers recognised goodwill in excess of
5 billion euros.
What do we really know about Goodwill and Impairment?
30
Healthcare - Goodwill evolution from 2006 to 2014 (in billion
euros)
2006
2007
2008
2009
2010
2011
2012
2013
30
2014
154
112
25
124
129
126
20
15
69
89
85
28
77
23
10
5
13
12
9
7
-0.02
-0.05
-0.04
0.00
0.00
0.00
0.00
-2
-0.26
-5
-0.80
Goodwill impairment
Goodwill acquisitions and other changes
Goodwill balance
Goodwill in
billion euros
2.64
5
3
0
170
160
150
140
130
120
110
100
90
80
70
60
50
40
30
20
10
0
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
56
69
77
85
89
112
124
129
126
154
Almost all out of the 18 companies report goodwill at the end of each year. In 2014,
goodwill is relatively concentrated: the companies with the six largest carrying amounts
represent 76% of the total goodwill balance. The ratio of goodwill to total assets
averaged 23% over the period, and goodwill to net assets averaged 50%. Both
increased over the period, from 17% to 27%, and 37% to 64%, respectively.
Healthcare - Evolution of goodwill and market capitalisation of
all companies (in billion euros)
2.00
1 200
1 007
1 000
861
604
800
703
620
582
471
537
567
611
0.80
600
400
0.26
0.00
0.02
0.05
2005
2006
2007
0.04
0.00
0.00
0.00
0.00
2008
2009
2010
2011
2012
200
0.00
0
Goodwill impairment
What do we really know about Goodwill and Impairment?
2013
2014
Market capitalisation
31
2.65
Impairment losses are infrequent. Over the period, the entities in the sample recognised
only 1.2 billion euros of impairment, 87% of which was recognised by two companies. 15
out of the 17 companies reporting goodwill at the end of each year do not appear to
report any impairment loss between 2005 and 2014, and only three recognised
impairment losses in two years. However, it should be noted that 16 companies in the
sample never reported a net loss over the period, and the other two reported a loss only
in one year.
2.66
The main impairment loss was recorded in a year when the entity reporting the loss
experienced a 10% increase in market capitalisation. The entity justified the loss as the
effect of the reassessment of a product in late-stage development and cuts in US
laboratory test reimbursement.
2.67
The market capitalisation of the Healthcare sample had a sharp drop in 2008, in a year
in which the net profit of the companies also decreased by 25%, and returned to
substantially the 2007 level in 2011.
2.68
It is interesting to note that the average market-to-book ratio over the period under
observation is 3.27, which is very high compared to other industries. The European
Healthcare sector has outperformed the broader markets, supported by its comparative
“safe haven” status in times of deep economic uncertainty. Although the companies in
the sample have differing exposures and business models, generally the sector is
characterised by a focus on growth from advancing new drug pipelines.
Information Technology
2.69
The following graph illustrates the changes in goodwill for the industry. The overall
balance significantly increased by 530% between 2005 and 2014, mostly due to new
acquisitions and a low level of impairments. One company accounts for almost 60% of
the total increase of goodwill in the period, with multiple acquisitions.
Information Technology - Goodwill evolution from 2006 to
2014 (in billion euros)
2006
2007
2008
2009
2010
2011
2012
2013
2014
12
50
45
10
24
40
35
8
30
15
6
30
32
30
24
10
9
4
9
20
7
6
2
2
0
-2
1
0
-0.01
0.00
-0.02
-0.92
0.00
-1.09
2
-0.52
3
10
-0.03
-0.06
0
Goodwill impairment
Goodwill acquisitions and other changes
Goodwill balance
What do we really know about Goodwill and Impairment?
32
Goodwill in
billion euros
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
7
9
15
24
24
30
30
32
35
45
2.70
On average 12 out of the 13 companies report goodwill at the end of each year. The ratio
of goodwill to total assets averaged 20% over the period, and goodwill to net assets
averaged 40%. Both increased over the period, from 8% to 30%, and 15% to 60%,
respectively. However, the distribution is quite wide, with four companies having a
goodwill to equity ratio close to or exceeding 100%; and seven companies a ratio of less
than 50%.
2.71
Goodwill impairment intensity is relatively low and goodwill impairments are highly
concentrated. Specifically, in 2009 and 2011, one company accounted for almost all the
annual impairment loss of the industry. The low impairments for Information Technology
industry may be because this sector has a very positive outlook, backed by the
digitalisation of businesses and consumers’ daily lives. It interesting to note that, the
average market-to-book ratio over the period under observation is 3
Information Technology - Evolution of goodwill and market
capitalisation of all companies (in billion euros)
2.00
300
257
240
205
211
250
222
198
169
200
155
137
150
1.09
115
0.92
100
0.52
50
0.06
0.00
2005
0.01
0.00
0.02
2006
2007
2008
0.00
2009
Goodwill impairment
2010
0.03
0.06
2013
2014
0
2011
2012
Market capitalisation
2.72
All companies in the industry lost a significant part of their market capitalisation in 2008,
ranging from 20% to 88% in value; only one company out of 12 reporting goodwill
recognised an impairment loss in 2008. The company that accounted for almost 60% of
the drop in the market capitalisation did not record any loss, but its goodwill to total assets
ratio at the end of 2007 was 1%.
2.73
The same company experienced a drop in its market capitalisation in 2012 equal to 22%,
while the other entities in the industry sample had a 78% increase. The entity did not
recognise an impairment loss; however, in 2013 it sold part of its operations and
reclassified 33% of its total goodwill as part of a disposal group.
What do we really know about Goodwill and Impairment?
33
Goodwill and nature of consideration
2.74
Some academic studies have assumed that there is a correlation between certain
characteristics of an acquisition and the magnitude of impairment losses recognised
subsequently. One characteristic that is presumed to be indicative of a potential
overpayment is that a significant portion of the consideration is paid in equity instruments,
and not in cash.
2.75
As an indirect way to test the hypothesis, a sample of sixty recent acquisitions from a
variety of industries was selected to consider if there is an association between the share
of consideration paid in cash and the portion of consideration allocated to goodwill. The
results of this limited sample do not seem to show an association.
2.76
In 50 cases, consideration only included cash. The proportion of the consideration
recognised as goodwill is illustrated in the next table:
Percentage of goodwill over total consideration
2.77
Number of
companies
<0%
5
0% - 25%
7
26% - 50%
15
51% - 75%
11
76% - 100%
9
>100%
3
Total
50
In the other 10 cases, consideration was paid partly or wholly in the acquirer's equity
instruments. The following table illustrates the percentage paid in shares and the
proportion between goodwill and total consideration.
Portion of consideration paid in shares
Portion of consideration allocated to goodwill
Between 0% and 49% (3 cases)
Between 33% and 69%
Between 50% and 99% (3 cases)
Between 28% and 60%
100% (4 cases)
What do we really know about Goodwill and Impairment?
Between 0% and 32%
34
How could the data be used in the debate?
2.78
The industry analysis could help in assessing if impairment losses are consistent with
the economic trends in the industry.
2.79
The analysis of goodwill and nature of consideration could help to assess the risk of
overpayment when companies pay for a business combination with their own shares. If
this was the case, it could be appropriate to change how this type of consideration is
measured.
What do we really know about Goodwill and Impairment?
35
Chapter 3: International comparison
Introduction
3.1
In this part of the study, the data for the European sample are compared to three other
geographical areas: the US, Australia and Japan. This part of the study was jointly
developed with the ASBJ.
Definition of the sample
3.2
We analysed data of 4 indices* comprising more than 1,000 companies from 2005 to
2014.
Index
Number of companies analysed
S&P
443
Europe
328
Nikkei
164
ASX
134
Total
1 069
3.3
The analysis started with the population of companies that constituted these indices as
of March 2016.
3.4
The entities included in the Japanese sample apply Japanese GAAP, which require
annual amortisation of the goodwill.
3.5
In this section, all amounts presented have been translated into US Dollars (USD), using
the following exchange rates:
*
a)
1 EUR = 1.20980 USD;
b)
1 JPY = 0.00835 USD; and
c)
1 AUD = 0.81720 USD.
Names (and abbreviations) of indices that represented the regions covered are as follows:
•
S&P 500 index (‘S&P’) of the U.S.;
•
S&P Europe 350 index (‘Europe’) of Europe;
•
Nikkei 225 index (‘Nikkei’) of Japan
(only those companies that applied Japanese GAAP throughout 2005-2014); and
•
S&P ASX 200 index (‘ASX’) of Australia
Data for Nasdaq 100 index of the U.S., Hang Seng 50 index of Hong Kong and KOSPI 100 index of
Korea were also collected and analysed. They were not included in this paper because they provided
similar results to one or more of the indices listed above.
What do we really know about Goodwill and Impairment?
36
Goodwill
Evolution of goodwill
3.6
The graph below illustrates the evolution of goodwill from 2005 to 2014. From 2005 to
2014 the total amount of goodwill increased across all indices. The rate of growth has
not been constant, and in some years there was a net decrease.
3.7
S&P and Europe had larger total amounts of goodwill than Nikkei and ASX. The biggest
increase was noted in S&P, where goodwill increased by 74% during the period.
Evolution of total goodwill
from 2005 to 2014
(in USD billions)
2 030
2 102
2 149
1 915
1 803
1 631
1 678
1 582
1 446
1 592
1 238
1 132
45
16
2005
1 608
1 568
1 623
1 505
1 430
1 457
1 491
94
99
99
104
103
98
97
100
37
49
22
35
40
50
33
45
28
2006
2007
2008
2009
2010
2011
2012
2013
2014
1 214
56
S&P
Europe
Nikkei
ASX
Evolution of average goodwill per company
3.8
The graph below illustrates the evolution of average goodwill per company from 2005 to
2014. From 2008 to 2014, average goodwill per company for S&P increased constantly.
In Europe, the average goodwill per company increased until 2011, then decreased in
2012-2013 and increased again in 2014. For both S&P and Europe, goodwill reached its
highest level in 2014.
What do we really know about Goodwill and Impairment?
37
Average goodwill per company
(companies with goodwill - in USD millions)
5 007
4 949
3 836
5 140
5 362
5 379
5 001
4 745
4 074
4 194
5 316 5 432
5 286
5 017
5 582
5 303
4 404
4 077
3 786
3 311
966
936
478
151
2005
578
226
2006
340
288
2007
2008
S&P
951
381
2009
Europe
981
970
928
934
983
299
318
372
394
398
2010
2011
2012
2013
2014
Nikkei
ASX
Goodwill changes
3.9
The following graph breaks down the changes in goodwill into acquisitions and other
changes and goodwill impairment losses. Acquisitions and other changes include new
acquisitions, disposals, and foreign currency translation effects.
3.10
As illustrated in the following graph, S&P recorded smaller amounts of goodwill
impairment compared to acquisitions & other changes, resulting in continuous increases
in the goodwill amount.
What do we really know about Goodwill and Impairment?
38
Goodwill changes S&P (USD billion)
212
191
112
12
-16
-4
-6
-62
2006
2007
2008
2009
145
132
151
81
-20
2010
-20
2011
-36
2012
Acquisition & Other Changes
3.11
63
-16
-9
2013
2014
Impairment
In 2012-2013, the decline of goodwill in Europe was due to less net acquisitions and high
impairment charges. The increase in 2014 was due to significant new additions of
goodwill and lower impairments.
Goodwill changes Europe (USD billion)
226
110
117
94
136
97
58
-24
-28
2006
-10
-67
2007
2008
2010
Acquisition & Other Changes
3.12
-11
-64
-53
2012
2013
-18
-81
2009
24
-15
2011
2014
Impairment
Nikkei recorded smaller amounts of goodwill impairment compared to acquisitions &
other changes. It also recorded relatively stable amounts of amortisation, resulting in
modest changes in the goodwill amount.
What do we really know about Goodwill and Impairment?
39
Goodwill changes Nikkei (USD billion)
8
9
8
10
10
8
7
4
2
-1.2
-1.6
-0.9
-0.7
2006
2007
-2.5
-2.5
-1.1
-1.3
2008
2009
-3.3
-3.4
-0.4
-0.3
2010
Acquisition & Other Changes
3.13
-3.7
-4.5
-0.4
-0.9
2011
-1.5
2012
Amortisation
-4.7
2013
2014
Impairment
ASX recorded a relatively large amount of impairment in 2011 and 2012, resulting in
decreases in the goodwill amount.
Goodwill changes ASX (USD billion)
38
11
0
2006
-1
2007
6
-2
2008
1
-1
2009
7
6
-1
2010
5
-8
-10
2011
2012
Acquisition & Other Changes
2
-3
5
-1
2013
2014
Impairment
Trend in goodwill as a percentage of net assets
3.14
From 2005 to 2014 the ratio of goodwill to net assets, or the book value of equity, was
higher for S&P (33%) and Europe (31%) than for Nikkei (4%) and ASX (20%). Figures
of Nikkei were low and relatively stable during the period.
3.15
Europe and ASX decreased gradually during the period (Europe since 2008) due to the
relatively higher increase in net assets.
What do we really know about Goodwill and Impairment?
40
Goodwill / net assets (all companies)
40%
35%
30%
34.4%
32.8%
34.2%
36.2% 36.1%
33.5% 32.4%
33.0% 32.7%
33.2% 33.0%
26.9%
36.0%
30.3%
32.9%
30.9%
28.6%
32.3%
31.8%
27.4% 27.6%
25.5%
25%
21.5% 21.4%
20.3%
20%
18.3%
17.3%
17.0%
18.6%
16.8%
15%
10%
5%
1.9%
2.4%
3.1%
4.2%
4.1%
4.4%
3.9%
4.4% 4.4%
3.8%
0%
2005
2006
2007
S&P
2008
2009
Europe
2010
2011
Nikkei
2012
2013
2014
ASX
Trend in goodwill as a percentage of market capitalisation
3.16
As illustrated in the following chart, the ratio of goodwill to market capitalisation, showed
more volatility during the period, which is mainly attributed to the volatility in the market
capitalisation.
What do we really know about Goodwill and Impairment?
41
3.17
S&P and Europe showed higher figures but less outstanding compared to goodwill to net
assets.
Goodwill / market capitalisation (all companies)
30.0%
28.3%
24.0%
25.0%
21.9%
20.2%
19.8%
20.0%
21.2%
16.3%
15.5%
15.0%
17.2%
16.0%
11.9%
12.3%
10.0%
10.4% 10.6%
13.3%
16.4%
15.8%
14.3%
13.6%
16.9%
17.2%
13.3%
12.3%
10.0%
8.4%
6.0%
6.0%
9.1%
4.6%
5.0%
3.9%
4.3%
4.9%
4.5%
2.4%
1.0%
4.1%
12.4%
8.8%
3.2%
1.3%
0.0%
2005
2006
2007
S&P
2008
2009
Europe
2010
2011
Nikkei
2012
2013
2014
ASX
Level of concentration of goodwill in 2014
Companies that accounted for 50% of total goodwill in 2014 (subpopulation)
3.18
The following table illustrates the number and percentage of companies that accounted
for 50% of the total goodwill in 2014. In addition, it illustrates the share of market
capitalisation of these companies. Less than or equal to 11% of the population in all
indices accounted for 50% of the total goodwill.
Index
number of companies
that account for 50% of
the total goodwill
% of companies that
account for 50% of
the total goodwill
% of market
capitalisation of these
companies
S&P
36
8.1%
31.9%
Europe
36
11.0%
28.8%
Nikkei
9
5.5%
21.2%
10
7.5%
47.1%
ASX
What do we really know about Goodwill and Impairment?
42
Number of companies that recognised goodwill exceeding 50% and 100% of their
net assets or market capitalisation in 2014
3.19
The following table illustrates the number of companies that recognised goodwill which
exceeds 50% and 100% of their net assets and the number of companies that recognised
goodwill which exceeds 50% and 100% of their market capitalisation.
3.20
For example, 64 companies in S&P and 36 companies in Europe recognised goodwill
exceeding 100% of their net assets. We can also observe that a few companies
recognised goodwill exceeding 100% of their market capitalisation.
Index
# of
companies
analysed
vs. Net assets
50% +
vs. Market capitalisation
100% +
50% +
100% +
S&P
443
155
64
13
1
Europe
328
107
36
25
3
Nikkei
164
0
0
0
0
ASX
134
27
9
10
1
Market capitalisation vs net assets
3.21
The following graph compares the market capitalisation and net assets. The difference
represents the value that the market assigns to the companies but that is not recognised
in the financial statements.
3.22
For S&P and Europe, historically the difference is a large portion of market capitalisation
and is mostly driven by market fluctuations rather than changes in recognised goodwill.
Nikkei has less unrecognised value since 2007.
What do we really know about Goodwill and Impairment?
43
S&P
Unrecognised value, goodwill, net assets less goodwill
20 000
(USD billion)
17 321
Unrecognised Value
Goodwill
2 000
15 777
Net Assets less Goodwill
Market Index
15 000
12 832
12 310
11 731
1 500
11 141
11 246
10 391
10 674
9 758
9 174
7 974
10 000
1 000
6 627
7 497
7 803
5 687
5 334
1 803
1 915
4 743
6 610
3 594
5 000
1 678
2 030
2 102
2 149
500
1 446
1 631
1 582
4 498
2 798
3 756
4 500
2 876
3 338
4 175
2 788
3 892
2 542
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
1 238
0
0
Unrecognised value, goodwill, net assets less goodwill
20 000
Europe
(USD billion)
Unrecognised Value
Goodwill
Net Assets less Goodwill
Market Index
8 520
15 000
8 781
9 187
1 500
7 780
7 510
7 289
9 578
6 806
10 000
6 702
5 144
4 866
5 000
3 703
4 451
2 351
1 399
1 592
1 608
1 568
1 505
2 275
3 998
1 096
1 491
3 691
1 623
1 430
1 457
3 567
3 914
3 979
2 590
3 040
4 264
2 900
3 694
2 439
2006
2007
2008
2009
2010
2011
2012
2013
2014
1 132
1 214
2 160
2005
750
2 298
0
0
What do we really know about Goodwill and Impairment?
44
Unrecognised value, goodwill, net assets less Goodwill
Nikkei
(USD billion)
1 666
1 687
1 161
1 800
1 516
Unrecognised Value
1 204
Goodwill
15 000
Net Assets less Goodwill
Market Index
762
1 300
938
816
22
800
49
815
245
16
724
219
1 009
813
10 000
68
50
42
45
28
33
35
37
40
5 000
1 248
834
903
888
768
860
860
976
877
1 086
300
0
-77
-200
2005
2006
2007
2008
2009
-82
-102
2010
2011
-12
-5 000
2012
2013
ASX
Unrecognised value, goodwill, net assets less GW
(USD billion)
1 900
2014
Unrecognised Value
1 029
7 000
Goodwill
Net Assets less Goodwill
Market Index
933
6 000
1 144
952
1 400
983
1 139
5 000
977
757
4 000
841
723
900
680
632
400
45
56
94
544
441
492
498
100
99
103
98
97
104
381
403
439
473
495
361
2009
2010
2011
2012
2013
2014
3 000
334
337
495
575
2 000
99
217
245
255
288
2005
2006
2007
2008
-100
1 000
0
What do we really know about Goodwill and Impairment?
45
Goodwill impairment losses
Evolution of goodwill impairment losses
3.23
Goodwill impairment losses were high in 2008 for Europe and S&P, and again in 2011
and 2012 mainly for Europe and ASX.
Evolution of goodwill impairment (& amortisation for Nikkei)
from 2005 to 2014 (in USD billions)
81
67
64
53
50
62
24
28
15
36
10
16
16
9
8
4
4
2
1
1
2008
2009
2010
10
4
4
6
5
5
2
2
1
20
20
6
4
2
18
3
0
2005
1
0
2006
2007
S&P
3.24
Europe
1
2011
2012
Nikkei
2013
2014
ASX
As illustrated in the following table, a relatively small number of companies recorded
goodwill impairment. The percentage of companies that recorded goodwill impairment
were higher for Europe than for other indices.
Number of companies with goodwill impairment (& amortisation, if applicable)
Number of
companies
analysed
2006
2007
2008
2009
2010
2011
2012
2013
2014
S&P
443
10
15
47
41
30
28
45
29
28
Europe
328
73
68
98
84
70
77
87
89
84
Nikkei
164
67
71
75
75
121
128
128
129
130
ASX
134
8
12
22
16
21
22
17
18
18
Index
What do we really know about Goodwill and Impairment?
46
Number of companies with goodwill impairment (& amortisation, if applicable) /
Number of companies with opening goodwill
Number of
companies
analysed
2006
2007
2008
2009
2010
2011
2012
2013
2014
S&P
443
2.7%
3.9%
12.1%
10.6%
7.9%
7.4%
11.7%
7.6%
7.2%
Europe
328
24.7%
22.8%
33.9%
28.9%
24.1%
25.9%
29.1%
30.2%
28.0%
Nikkei
164
63.8%
72.4%
77.3%
76.5%
126.0%
108.5%
101.6%
105.7%
103.2%
ASX
134
8.4%
12.4%
22.0%
15.7%
20.2%
20.6%
16.2%
17.1%
17.3%
Index
3.25
The following graphs compare the evolution of goodwill impairment to the evolution of
the market index.
3.26
The graphs show that goodwill impairment generally increased when the stock market
index showed a downward trend, with the exception of 2012 for S&P, ASX and Nikkei
when the market capitalisation increased but impairment was higher than the prior year.
Evolution of goodwill impairment compared to the market
index - S&P
70 (goodwill impairment in billion euros and market index in market points)
2 059
60
40
1 418
1 900
1 700
1 426
1 468
1 248
1 258
30
1 500
1 258
1 300
1 115
36
20
1 100
20
10
2
4
2005
2006
16
903
900
20
16
9
6
0
2007
2 300
2 100
1 848
62
50
2 500
700
500
2008
2009
Goodwill Impairment
What do we really know about Goodwill and Impairment?
2010
2011
2012
2013
2014
Market Index
47
Evolution of goodwill impairment compared to the market
index - Europe
90
80
70
60
50
40
30
(goodwill impairment in billion euros and market index in market points) 1 600
1 498 1 505
1 500
1 401
835
1 339
1 400
1 286
67
1 300
1 143
1 200
1 124
1 005
50
1 049
1 100
64
20
28
10
24
10
1 000
53
81
900
18
15
0
800
2005
2006
2007
2008
2009
2010
2011
2012
Goodwill Impairment
2013
2014
Market Index
Evolution of goodwill impairment and amortisation compared to
the market index - Nikkei
7 (goodwill impairment and amortisation in billion euros and market index in JPY)18 000
16 291
15 308
6
17 226
5
17 451
16 111
8 860 10 546
10 229
8 455 10 395
3
2.5
2
0
16 000
15 000
4
1
17 000
1.2
1.6
0.6
0.9
0.7
2005
2006
2007
4.7
3.7
2.5
3.3
13 000
12 000
11 000
3.4
10 000
0.9
Goodwill Impairment
14 000
4.5
1.1
2008
1.3
0.4
2009
2010
0.3
2011
0.9
2012
Goodwill Amortisation
What do we really know about Goodwill and Impairment?
1.5
9 000
0.4
2013
8 000
2014
Market Index
48
Evolution of goodwill impairment compared to the market index ASX
12
(goodwill impairment in billion euros and market index in market points)
6 340
6 500
10
6 000
4 057
5 411
8
5 670
6
4 763
3 722
5 500
5 000
5 352
4
7 000
4 649
4 500
4 871
4 745
10.5
7.8
2
0.1
0.1
0.6
1.5
2005
2006
2007
2008
0.8
0.9
2009
2010
0
4 000
3.1
3 500
1.3
3 000
2011
2012
Goodwill Impairment
2013
2014
Market Index
Intensity of goodwill impairment
3.27
For S&P and Europe, the ratio of goodwill impairment to the opening goodwill amount
ranged from 1%-5%. The ratio was higher for Nikkei (around 10%-14%) when including
goodwill amortisation.
Goodwill impairment (&amortisation) / opening goodwill
13.5%
13.1%
13.0%
11.5%
10.5%
10.0%
11.5%
10.2%
10.2%
10.4%
7.5%
5.1%
4.7%
4.0%
3.4%
2.4%
1.1%
3.8%
0.9%
0.3%
0.3%
2006
0.4%
2007
1.6%
2008
S&P
1.7%
1.0%
0.8%
2009
1.2%
1.9% 3.1%
1.0%
0.9%
2010
Europe
0.4%
1.3%
1.2%
0.8%
2013
2014
1.1%
2011
Nikkei
What do we really know about Goodwill and Impairment?
2012
ASX
49
Industry analysis
Average goodwill per company by industry in 2014
3.28
The graph below breaks down the average goodwill per company in 2014 by industry.
The Telecommunications Services industry in S&P and Europe had higher amounts of
goodwill per company. Consumer Staples and Healthcare in S&P and Europe showed
larger amounts. Unlike other indices, Utilities in Europe recognised a larger amount of
goodwill per company.
(USD million)
30 000
Average goodwill per company (that recognised goodwill) by
industry in 2014
25 000
20 000
15 000
10 000
5 000
0
S&P
Market
Material Industri
Averag Energy
s
als
e
5 582
3 050
3 011
5 662
Cons.
Discr.
Cons.
Stap.
Healthc Financi
are
als
IT
Telcos Utilities
3 250
7 170
7 649
6 707
5 608
25 996
2 298
Europe
5 303
2 168
3 217
3 647
3 814
10 326
10 939
4 019
4 518
13 992
6 982
Nikkei
398
12
250
206
52
1 002
983
891
234
2 689
91
ASX
983
1 866
987
340
361
2 054
913
1 745
664
639
536
Goodwill as a percentage of net assets by industry in 2014
3.29
The graph below shows the ratio of goodwill to net assets in 2014 by industry. Similar to
average goodwill per company, the Telecommunication Services, Consumer Staples and
Healthcare industries indicated higher figures. The Industrials industry in S&P and
Europe also showed higher figures. ASX ranked higher in some industries, particularly
the Information Technology industry. Consumer staples and health care industries in
Nikkei showed relatively higher figures compared to other industries.
What do we really know about Goodwill and Impairment?
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140.0%
Goodwill / net assets by industry in 2014
120.0%
100.0%
80.0%
60.0%
40.0%
20.0%
0.0%
S&P
Market
Material Industri
Energy
average
s
als
32.3%
7.1%
41.5%
57.2%
Cons.
Discr.
44.9%
Cons.
Stap.
55.2%
Healthc Financi
are
als
59.3%
18.2%
IT
Telcos
Utilities
36.8%
100.8%
15.9%
Europe
27.6%
5.4%
18.5%
58.6%
29.5%
65.1%
62.8%
11.5%
56.5%
59.9%
31.9%
Nikkei
3.8%
0.5%
4.1%
2.7%
0.6%
17.1%
23.9%
2.0%
6.0%
9.9%
0.3%
ASX
16.8%
12.9%
6.9%
26.9%
42.8%
47.8%
72.9%
14.2%
117.0%
13.9%
20.4%
What do we really know about Goodwill and Impairment?
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Appendix 1 – Some evidence from academic research
1
The objective of the present study is mostly to present objective data on the evolution of
goodwill and impairment losses over the period, without drawing a conclusion on what the
accounting treatment of goodwill should be. However, it may be helpful to include some
reference to the evidence from academic research.
2
Due to space constraints, this appendix is not intended to provide a comprehensive picture
of the academic literature available on the topic.
3
In recent years, a number of academic literature reviews have been published on goodwill
accounting in entities reporting under IFRS or US GAAP. Among other topics, these reviews
have focused on studies that researched:
a)
Whether recognition of goodwill is value relevant;
b)
Whether the impairment-only model has increased or decreased relevance compared
to the prior accounting;
c)
Whether impairment losses are recognised on a timely basis; and
d)
The determinants of goodwill impairment.
4
Other research topics that have been investigated, but not covered in this Appendix, are
whether certain acquisition characteristics are associated with impairment intensity,
whether goodwill is correlated with future performance and cash flows and the degree of
compliance with disclosure requirements.
5
There are a few studies that consider the European Union as a whole. Most studies concern
one single country, frequently US or Australia. Although the accounting for goodwill under
US GAAP is similar to IFRS, one literature review notes that transposing results from US
research into IFRS or Europe is questionable due to the fact that the former concentrates
on an environment with homogeneous regulatory settings.
6
Sahut et al (2011) examine a sample of companies from 10 EU countries and conclude that
goodwill is positively correlated with stock prices (and negatively correlated with
impairment), but its value relevance has decreased post-IFRS adoption. Aharony et al
(2010) examine a sample of companies from 14 EU companies and find an increased
relevance, and the same conclusion is reached by Oliveira et al (2010) in a Portuguese
study. Hamberg and Beisland (2014) confirm the value relevance of goodwill for Sweden
but do not note a significant change post-IFRS adoption.
7
While most studies find a positive correlation between goodwill and stock prices, there is
mixed evidence on whether the adoption of IFRS 3 has increased the relevance of goodwill.
Moreover, in some cases national GAAP allowed direct write-off against equity; therefore,
even an increase in value relevance post-IFRS adoption does not necessarily indicate that
the impairment-only model provides more relevant information than an impairment and
amortisation model.
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8
Studies investigate the timeliness of impairment losses either by looking at short-term stock
market reaction to impairment or longer-term association. The assumption is that managers
have generally better information than outsiders, so if they recognise impairment on a timely
basis, this is new information to the market and investors should react. However, if
impairment losses are deferred, it is assumed that markets would have already priced them
in and there will be little effect.
9
Some US studies found evidence that impairment losses lag deteriorating operating
performance and stock returns, which suggest some delay in recognition. Amiraslani et al
(2013) analyse a sample of 4 474 listed companies across Europe from 2010 to 2011 and
conclude that when companies experience bad news (decreases in economic value), a
significant proportion of economic losses are reflected in current period earnings:
approximately 31% of losses in economic value are recognised in current period earnings,
with 17.8% attributable to goodwill impairment charges. Moreover, they suggest that the
correlation between stock returns and goodwill impairment is stronger for those countries
where the enforcement is stronger and the market is more developed.
10
Different studies attempted to assess if goodwill impairments are associated with economic
factors (such as low profitability) while others investigated if they are associated with
managerial incentives (such as the tenure or change in the CEO).
11
A number of European studies conclude that goodwill impairment losses are negatively
associated with profitability or other performance measures.
12
Less clear is the evidence about how managerial incentives impact impairment recognition.
Based on US literature, there are indications that factors such as income smoothing, high
unexpected losses (so-called ‘big bath behaviour’), CEO changes and management
compensation are associated with impairment losses. European studies are less
conclusive, with some indicating a weak correlation only and some finding no evidence of
association.
13
Some studies note that it may be difficult to differentiate between economic factors and
managerial incentives. For instance, when an entity reports a significant impairment under
a new CEO, this may point to managerial opportunism; but the change in CEO is often
triggered by poor economic performance, which may explain the impairment.
What do we really know about Goodwill and Impairment?
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Appendix 2 – Bibliography
Aharony, J., Barniv, R., & Falk, H. (2010). The impact of mandatory IFRS adoption on equity
valuation of accounting numbers for security investors in the EU
Amiraslani, H, Iatridis, G.E. & Pope, P.F. (2013). Accounting for asset impairment: a test of IFRS
compliance across Europe
Boennen, S. & Glaum, M. (2014). Goodwill accounting: a review of the literature
D’Arcy, A. & Tarca, A. (2016). Reviewing goodwill accounting research: what do we really know
about IFRS 3 and IAS 36 implementation effects?
Duff and Phelps (2014). 2013 European goodwill impairment study
ESMA (2013). European enforcers review of impairment of goodwill and other intangible assets
in the IFRS financial statements
Glaum, M., Landsman, W.R., & Wyrwa, S. (2015). Determinants of goodwill impairments under
IFRS: international evidence
Hamberg, M., & Beisland. L.-A. (2014). Changes in the value relevance of goodwill accounting
following the adoption of IFRS 3.
Houlihan-Lokey (2010 and 2012). The European goodwill impairment study
Oliveira, L., Rodrigues, L. L., & Craig, R. (2010). Intangible assets and value relevance: evidence
from the Portuguese stock exchange
Sahut, J.-M., Boulerne, S., & Teulon, F. (2011). Do IFRS provide better information about
intangibles in Europe?
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Acknowledgments
This paper has been prepared by an EFRAG Secretariat team composed of Filipe Alves and
Ioanna Chatzieffraimidou, coordinated by Filippo Poli.
EFRAG thanks Yasunobu Kawanishi, Tomo Sekiguchi and the Accounting Standards Board of
Japan for their continuing cooperation.
EFRAG thanks the Organismo Italiano di Contabilità for their assistance.
What do we really know about Goodwill and Impairment?
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