Hvad blev der af goodwill? Danske perspektiver

Christian Friis & Kristoffer Nielsen

Student thesis: Master thesis

Abstract

In this thesis we are exploring how goodwill impairment has been conducted through the years of the financial crisis. Our motivation for this subject is twofold. First off indications are present that impairment has not been conducted thoroughly through the years 2005 – 2014. This was amongst others a subject raised by ESMA in the recent years in their publication “Eurpoean enforcers review of impairment of goodwill and other intangible assets in the IFRS financial statements”. Secondly, the Danish government under Helle Thorning Schmidt announced the end of the crisis as the announced the election for parliament in 2015. Our study was conducted with the focus on when and how goodwill impairment has been conducted during the crisis years compared to market expectations. In order to answer the overall question we initially delved into the theoretical aspects derived from the key standards IFRS 3 & IAS 36. From this, we learn that goodwill is recognized when a company purchase activities and other companies. Additionally we learn how goodwill is allocated to cash-generating units (CGU’s) in the company. The importance of the identification level of the CGU’s is a main subject of our discussion. Additionally we are discussing whether goodwill is an asset or not and the implications if goodwill were not a recognizable asset. Our position is that the recognition as an asset is relevant. The secondary part of our theoretical aspects delve into the aspects that need to be determined in order to conduct an impairment test of goodwill. We focus on value-in use based on a Discounted Cash-flow model, which our data shows is the most commonly used model. Finally, we are conducting research into the best-practice recommendations given by “Årsrapportprisen 2015, specialpris 2 – Nedskrivningstest”. The key aspects from this is focused on, only applying goodwill to a few CGU’s. Further recommendations focus on the disclosure requirements especially relating to discussion of the applied factors. Applying a sensitivity analysis detailing impact of change in multiple factors and margin. From the recommendation on CGU allocation, we note that the allocation to few CGU’s is a direct opposite of the theory according to IAS 36. We agree with the recommendation, as detailed information on a few CGU’s is far better than superficial information on many CGU’s. The main problem with allocating fewer CGU’s however, is that allocating to a lower level generally will generate more impairment over time. When allocating goodwill to a higher level (fewer) of CGU’s the different assets over a large CGU will have the ability to compensate for each other. In between our overall and more detailed, theoretical we are introducing the companies in our study. We have studied the annual reports of 12 companies of the years 2005 – 2014. While introducing these companies we are giving statistical description of key financial figures such as revenue, balance sheet amount and share of goodwill in the balance sheet. Additionally we are carrying out a sensitivity analysis derived from the ESMA paper. This analysis is based on the ratio of equity in the annual report against the total market value defined as no. of shares x share price. If the market value is below equity, there is an indication of impairment. We found that there are several companies, which carry indication of impairment in one or several years. Especially in 2012 where 9 out of 12 companies has a ratio above 100 % indicating impairment. Conducting our study we have mapped all the applied requirements of disclosure, as well as the impairments carried out in the period. As per our initial expectations there have been conducted few impairments on goodwill. The majority of these were conducted in the years 2011 – 2013 and can be related to a few companies. This is a weakness of our study that the test population is too small to be able to give general guidance on all the noted companies in Denmark. Additionally we found that the main model is the value in use based on the discounted cash-flow model. The requirements for disclosure are generally not met. It is especially the sensitivity analysis, which is lacking. From our study we found that these are not included before 2009 and only 4 of the companies are using them during the period. Finally, we have conducted an analysis on whether there was any correlation between the impairment loss and a fall in share price. Our analysis was inconclusive in this matter.

EducationsMSc in Auditing, (Graduate Programme) Final Thesis
LanguageDanish
Publication date2015
Number of pages123