The value-relevance of goodwill reported under IFRS 3 versus IAS 22

Abstract

The application of International Financial Reporting Standard (IFRS) 3, which became compulsory for financial periods beginning on or after 31 March 2004, significantly changed the initial and subsequent measurement of goodwill in annual reports. This change in the accounting treatment of goodwill was not universally accepted and there has been ongoing debate around the efficacy of the new goodwill treatment. This study uses a revised Ohlson-type value-relevance model (Ohlson, 1995) to examine the association between the goodwill balance reported and the market value of a company before and after the introduction of IFRS 3. The findings show that the goodwill balance reported according to IFRS 3 provides information that is more value-relevant than the previous International Accounting Standard (IAS) 22 treatment. In the light of the ongoing debate around the accounting treatment of goodwill, this study provides regulators and researchers with valuable information to further assess the efficacy of the IFRS 3 goodwill treatment.