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Emerald Group Publishing Limited
Copyright © 2010, Emerald Group Publishing Limited
Article Type: Guest editorial From: Managerial Finance, Volume 36, Issue 9.
About the Guest Editors
Tyrone M. CarlinProfessor of Financial Reporting & Regulation in the Faculty of Economics and Business at the University of Sydney.
Nigel FinchSenior Lecturer in Accounting in the Faculty of Economics and Business at the University of Sydney.
This is a special issue of Managerial Finance dedicated to the topic of asset impairment.
In the continuing evolution of accounting standards, the adoption of fair value techniques applied to measurement and reporting is becoming increasingly prevalent across a greater number of balance sheet line items. Not only does this result in the possibility of more frequent changes in the reported value of assets and liabilities, it also introduces the knock-on effect of recognizing losses as a result of devaluation, an outcome known as impairment.
One of the more challenging aspects of contemporary financial reporting is the application of rigorous valuation and impairment testing methodologies to intangible asset classes, as required under the Statement of Financial Accounting Standard (SFAS 142) and International Accounting Standard (IAS 36). While accounting and finance practitioners have grappled for many years with periodic revaluation of identifiable intangible assets (such as brand names, trademarks and patents), new challenges have emerged as a result of the introduction of mandatory impairment testing of goodwill, which is by definition an unidentifiable intangible asset. A further development in impairment accounting has ensured that impairment losses once incurred are applied fully against goodwill in the first instance, before spilling over to other asset classes. This practice sees the spotlight now shining brightly on goodwill, a once neglected and often misunderstood store of value on the corporate balance sheet. This special issue will focus on the challenges in estimating values and impairment losses for identifiable and unidentifiable assets.
The first paper in this special issue is by Eugene E. Comiskey and Charles W. Mulford of Georgia Institute of Technology, who identify the triggering events behind impairment losses across a large sample of US listed firms and further investigate the compliance with goodwill impairment tests under the required disclosure rules. They find that there are numerous triggering events which vary greatly in significance and severity, even within the same sectors. They also identify diversity in valuation methods applied by firms and little conformity in the selection of discount rates, a key input into the DCF valuation model being used.
In the next paper, Wolfgang Schultze and Andreas Weiler of Augsburg University in Germany discuss how accounting information gathered for the purpose of goodwill impairment testing can be drawn into performance management and control systems. This information can be used to assist in identifying value creation and realization in the firm and is seen as a more superior approach than the traditional residual income-based performance metrics currently employed.
As Guest Editors , we have also included a research paper which compares and contrasts the practice of impairment testing and the quality of compliance across two IRFS jurisdictions, Australia and New Zealand. The major focus of this paper is on the reasonableness of the discount rates incorporated in the valuation methodologies adopted by the studied firms. We find evidence to suggest that firms are opportunistically selecting lower than expected discount rates, which may be resulting in the avoidance of impairment losses.
Also on the topic of discount rate selection, Marc Schauten, Rudolf Stegink and Gijs de Graaff present an empirical study assessing the reasonableness of the discount rates adopted by a large sample of US Standard & Poor's 500 firms. They examine the methods used by firms to derive a discount rate and determine that the levered cost of equity is the best proxy for the required return on intangible assets.
Finally, Wayne Lonergan, a valuation practitioner and former standard-setter, provides a practitioner's viewpoint on asset impairment and a critique of current practice. His paper identifies a series of technical flaws in the current accounting standards relating to asset impairment and points out that many of the valuation methodologies that are now embedded within the contemporary crop of accounting standards are not only prone to application error, but are also ripe for gaming.
We believe that the papers in this special issue of Managerial Finance will provide a timely and practical analysis of the many issues surrounding asset impairment and we trust this will be of particular interest to finance practitioners, auditors, regulators and standard setters.
We also wish to thank the editor, Don T. Johnson, and the publisher, Emerald Group Publishing, for allowing us the opportunity to work with them on putting together this special issue.
1. Since we edited this special issue, our paper was submitted to another person who acted as editor on this paper, sending it through the full double-blind, peer-review process, in the same manner as that applied to all other papers in this issue.
Tyrone M. Carlin and Nigel FinchFaculty of Economics and Business, University of Sydney, Australia