The use of fair value in financial reporting has been a critical issue for some time. In the last five years, after the boom phase of company takeovers, with the financial crisis spreading to the general economy, impairment testing for goodwill has taken centre stage and has become a hot topic. This was especially true for larger banks which have pursued M&A strategies over the past decade. In this paper we investigate and compare the information content of the goodwill impairment testing during 2006 – 2011 in the european banking sector. We review the annual reports of the top twenty banking groups in the eurozone ranked by market capitalization and total assets; then we examine all the information provided by the companies about the estimation of the “recoverable amount” using a DCF model according to Ias 36; based on the financial information given in the annual reports during 2006 – 2011, the core valuation techniques has been divided as follows: i) identification of cash generating units; ii) scenario analysis and forecast of free cash flows; iii) estimation of “terminal value”; iv) cost of capital and g-rate calculation; v) sensitivity analysis. Evidence shows a significant increase in the number of information related to the topics, especially after the world Financial Crisis (2009-2011). The findings should be of interest to underline some questions related to both the effectiveness of goodwill impairment tests under uncertainty and disagreement in economic and financial forecasting and the value-relevance of the specific information given in the European banks annual accounts.

The information content of goodwill impairment before and after the Financial Crisis: evidence from European listed banks

CAMODECA, Renato Salvatore;ALMICI, Alex
2012-01-01

Abstract

The use of fair value in financial reporting has been a critical issue for some time. In the last five years, after the boom phase of company takeovers, with the financial crisis spreading to the general economy, impairment testing for goodwill has taken centre stage and has become a hot topic. This was especially true for larger banks which have pursued M&A strategies over the past decade. In this paper we investigate and compare the information content of the goodwill impairment testing during 2006 – 2011 in the european banking sector. We review the annual reports of the top twenty banking groups in the eurozone ranked by market capitalization and total assets; then we examine all the information provided by the companies about the estimation of the “recoverable amount” using a DCF model according to Ias 36; based on the financial information given in the annual reports during 2006 – 2011, the core valuation techniques has been divided as follows: i) identification of cash generating units; ii) scenario analysis and forecast of free cash flows; iii) estimation of “terminal value”; iv) cost of capital and g-rate calculation; v) sensitivity analysis. Evidence shows a significant increase in the number of information related to the topics, especially after the world Financial Crisis (2009-2011). The findings should be of interest to underline some questions related to both the effectiveness of goodwill impairment tests under uncertainty and disagreement in economic and financial forecasting and the value-relevance of the specific information given in the European banks annual accounts.
2012
9781922069078
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/11379/161100
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