Tomas Hjelström

This paper provides evidence on the choices made by European firms when measuring non-controlling interest (NCI) and goodwill. Since 2009, IFRS 3 allows measurement of NCI either at fair value (full goodwill method) or at the proportionate share of net assets (partial goodwill method). IFRS 3 allows this policy choice on a per transaction basis. Our data comprise 188 hand-collected firm choices in connection with business combinations with remaining NCI, between 2010 and 2016. We use the theoretical framework developed by Stadler and Nobes (2014) explaining differences in firms' choices of overt accounting options by country, industry, and firm-specific topic factors. Based on univariate and multivariate analyses, we find that transaction-specific and firm-specific topic factors influence accounting policy choice, whereas country and industry factors do not. The choice has different effects on financial leverage and operating returns, which inform firm-level preferences. Regarding choices made at the transaction level, we find acquirers with an intention to buy additional shares from non-controlling shareholders tend to prefer the full goodwill method. Thus, the choice of accounting method conveys information to users about future additional acquisitions and has implications for standard setters, indicating that offering choices at transaction level may increase the forward-looking content of financial statements.

Stakeholders have questioned the effectiveness of the goodwill impairment-only approach, which was widely adopted in the early 2000s. Much empirical work has been conducted on the matter, but there is a need for more conceptual work. This paper applies goodwill-components theory to derive the theoretical objective of the goodwill impairment test and to define impairment effectiveness – a concept previously undefined but often referenced in the debate. Goodwill-components theory allows us to address the various components of goodwill instead of viewing accounting goodwill as homogeneous. Adopting this framework, we compare the current International Financial Reporting Standards (IFRS) model to two alternative impairment-only models, the pre-acquisition headroom (PH) model and the fair value (FV) model. We conclude that the PH model results in more effective impairment testing than the current IFRS model. Compared to the FV model, the PH model is more effective in the short run and less effective in the long run. Our analysis further identifies situations where the PH model is “over-effective”. The framework is also used to illustrate the effectiveness of the current IFRS model compared to a goodwill amortization model.

We analyze executives' (CEOs, CFOs, and Board Chairpersons) personal tax returns to investigate whether and how their personal tax behavior is associated with the tax avoidance of their firms. We develop various measures of executives' personal tax behavior that are related to their personal risk propensity, ethics, financial incentives, and awareness of tax planning opportunities and risks. Our empirical results show that CEOs' and CFOs' personal tax behavior is related both to nonconforming and conforming corporate tax avoidance. We find no such results for Board Chairpersons.

In 2005, the International Financial Reporting Standards (IFRS) for goodwill accounting replaced the previously used two-component approach (i.e., goodwill amortization plus additional impairment when required) with an impairment-only approach. There has been renewed interest in this issue since the findings of the post-implementation review of IFRS 3. This paper develops a theoretical model of the initial and subsequent accounting for goodwill, that is usable for evaluating the relevance of different standard-setting solutions in this area. The model indicates that the current impairment-only approach creates a buffer that protects accounting goodwill from impairment. The buffer is created as a result of both internally generated core goodwill and the fair value of assets/liabilities not recognized on the statement of financial position. In turn, the impairment test will understate the economic loss and serve as a weak indicator of acquisition success/failure. Based on our model, we propose changing the impairment test procedure so that the same measurement and recognition criteria are employed as at initial recognition. Consequently, the representation of goodwill on the statement of financial position, and the effectiveness of goodwill impairment losses as an indicator, would improve.

The valuation of entrepreneurial start-ups for the purpose of equity allocation to business angel investors is an enduring point of discord between the contracting parties. Lack of information and lack of trust, plus the asymmetry of both information and trust between the parties, typically cause the investor to apply a higher risk premium and argue for a larger share of the firm's equity than the entrepreneur deems reasonable. Recent literature on interpersonal trust and the inclusion of management controls is incorporated into a conceptual model to examine the potential for a win–win situation based on information provision and trust building during the negotiation process. Although the entrepreneur and investor may begin with widely divergent ambit claims, hearing and discussing the other's perspectives will redress information asymmetries, build mutual trust and produce a win–win situation for both parties.