THE VALUE RELEVANCE OF GOODWILL AND GOODWILL AMORTIZATION IN A DANISH SETTING

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Abstract

Based on data from the Danish Stock Exchange, this paper examines the value relevance of purchased goodwill and explores how goodwill should be measured subsequent to initial recognition. Danish accounting legislation requires capitalization and amortization of purchased goodwill. As of 2005 Danish listed companies must comply with international financial reporting standards (IFRS) issued by the International Accounting Standards Boards (IASB). An exposure draft (ED 3: Business Combinations) is presently under consideration by the IASB. If this exposure draft is implemented, Danish listed companies must carry out impairment tests on goodwill. The value relevance is tested by examining the association between goodwill and goodwill amortization and share prices, incremental to other accounting variables.The overall findings suggest that investors perceive goodwill as an asset with a long economic life time. The results support the Danish Financial Statements Act that requires capitalization of all purchased goodwill. The findings brings into question if goodwill amortization provides useful information to investors. This suggests that impairment testing might be an alternative way to measure acquired goodwill assets in subsequent years.

Keywords: Capital Markets, Investors, Financial Reporting, Goodwill, Amortization, Impairment Tests, Value Relevance

How to cite this paper: Petersen, C. V. (2006). The value relevance of goodwill and goodwill amortization in a Danish setting. Corporate Ownership & Control, 4(1-1), 227-241. https://doi.org/10.22495/cocv4i1c1p5