(IR) Relevance of goodwill impairment: the case of European banking (2005–2015)

Jorge Pallarés Sanchidrián (), Javier Pérez García () and José A. Gonzalo-Angulo ()
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Jorge Pallarés Sanchidrián: Alcala University
Javier Pérez García: Alcala University
José A. Gonzalo-Angulo: Alcala University

Journal of Banking Regulation, 2021, vol. 22, issue 1, No 3, 24-38

Abstract: Abstract The traditional model of systematic amortization over its useful life was replaced by the annual application of an impairment test, with the intention of correcting the problems of the lack of relevance and difficulty in estimating said useful life of the previous regulatory framework. The aim of this study is to investigate whether the application of the impairment test between 2005 and 2015 in the main European banks has overcome these problems or whether, on the contrary, its application by managers has been discretionary, opportunistic and arbitrary, presenting, as a result, artificially inflated earnings. Our results obtained show that systematic amortisation has been replaced by opportunistic impairment, which does not reflect the economic conditions underlying the financial activity of the main European banks, which gives rise to less relevant financial information and possible harmful pro-cyclical effects.

Keywords: Goodwill; Impairment test; Value relevance of financial reporting; Banking sector; Banking supervision; Earnings management (search for similar items in EconPapers)
JEL-codes: G20 G28 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1057/s41261-020-00126-0

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