ABSTRACT: (THE GOODWILL IMPAIRMENT BETWEEN FINANCIAL MEASUREMENT AND BUSINESS VALUATION: A CASE STUDIES’ ANALYSIS). This study investigates the goodwill impairment in the international accounting standards IAS/IFRS account- ing environment. We highlight the mismatch between the outcome of the impairment test, reported in the financial statements of the com- panies, and the evidence presented by the ex-post financial performance of the cash generating units (CGU) to which the tested goodwill is attributed. In order to investigate the financial statement valuations dynamics reconnected to the management’s implementation of IAS 36, we use a case study methodology. We identify three different case studies of Italian listed companies. In this way, we show the extent of the discretion allowed to managers in deciding the timing and the amount of the reported goodwill impairment. We also compare the IAS36 discounted cash flow (DCF) methodology with other business valuation methods, such as income approach and Market Value Added approach. The comparison gives further evidence on how the managers are able to subjectively select the operating cash flows to be used in the impairment procedure and use excessive optimism in the cash flows projections. The findings highlight the risk that the good- will impairment is used to manage earnings as predicted by the agency theory. We conclude with a critical discussion of the IAS36 im- pairment procedure, also in the light of the business evaluation best practice. First, we note that the use of the DCF is not always ap- propriate, especially in crisis situations where it is reasonable to expect negative financial flows and negative income. Then, we underline that companies should clarify the cash flow configuration they use in the impairment test and the importance of the choice of WACC’s determinants in the impairment test. Overall, an increased disclosure may help the financial reporting external users to assess the firm goodwill value and the future performance. Inaccurate goodwill impairments lead to inflated goodwill values and distorted future per- formance perspectives. Disclosure may help avoid such situations and compensate the difficulties in the audit of this highly subjective fair value measurement.
KEYWORDS: impairment test, goodwill, valuation.
