An investigation of goodwill impairment testing practices in Australia public companies

In 2005, Australian Accounting Standard Board (AASB) adopted International Financial Reporting Standards (IFRS) to apply impairment testing on acquired goodwill, instead of amortising it on straight line basis. The Australian companies can choose either fair value less cost to sell (FVLCS) method and value in use (VIU) method. All companies under this study (consisted of 18 companies) choose to use VIU method to test whether their goodwill is impaired. The 18 companies were divided into three industries, i.e. capital goods industry, commercial services and supplies industry and information technology (IT) industry. In order to investigate whether the companies’ impairment testing practices are consistent with the standard and with each other, comparison between the companies (using pretax discount rates) and in the company itself (using growth rate) were undertaken. For consistency, only companies in same industry were compared with each others. Overall, based on information provided in the companies’ annual reports, impairment testing practice (VIU method) in Australian companies is consistent with the standard guidelines. Furthermore, the companies’ practices in capital goods industry and commercial services and supplies industry are consistent with each other. However, companies’ practices in IT industry are not consistent with each other. This may due to the fact that companies in IT industry have their own competitive advantage which differ them from each other.