Back to goodwill amortisation: impact of the 2016 Spanish regulation on the mispricing of listed firms

Abstract

PurposeThis article analyses the recent inverse transition from goodwill impairment to goodwill amortisation implemented in Spain in 2016. The authors contribute to the existing literature by describing their differing impact over goodwill and impairment figures and testing the impact of goodwill on balances over stock prices.Design/methodology/approachFirst, using a database with all Spanish non-financial firms with positive goodwill on their balance sheets, the authors describe the impact of the regulatory change over goodwill and impairment figures. Second, focussing on listed firms only, the authors study the impact of financial reporting of goodwill and impairment on stock prices.FindingsAverage goodwill per company and the share of goodwill over total assets significantly reduced after 2016, but the results cannot be easily extrapolated to listed firms due to lack of data. When testing the impact of potentially inflated goodwill balances on prices, the authors find that investors kept overvaluing firms with inflated goodwill balances also with the amortisation method.Research limitations/implicationsThe lack of data for listed firms with goodwill in Spain makes it difficult to obtain statistically sound evidence, the results could be biased by the cultural traits of the country and related to the intensity of enforcement and monitoring.Practical implicationsThis might suggest that the effects of the impairment method linger, so the authors conform to the interpretation that the systematic amortisation paired with a periodic impairment test may lead to accounting that better reflects the underlying economics of goodwill.Originality/valueTo the best of the authors' knowledge, there are no recent articles that analyse this new “turn-around” requiring again the systematic amortisation of goodwill.