IFRS 3, IAS 36 and Disclosure: The Determinants of the Quality of Disclosure

Abstract

The paper presents the results of an empirical
analysis on the quality of the mandatory disclosure of IFRS 3 –
business combinations and IAS 36 – impairment of assets. The
analysis focuses, in particular, on the determinants that influence
the quality of disclosure. The aim of the paper is to verify the
determinants that impact on the quality of disclosure on
recognition, measurement and impairment of goodwill. The
analysis was carried out on Italian listed groups belonging to the
main stock exchange index (FTSE/MIB40); the groups listed on
FTSE/MIB40 represent 80% of the total market capitalization of
Italian listed companies as stated by the Italian Stock Exchange.
The international financial crisis has lead many companies to
acquire other groups or to merge together and therefore to
recognize impairment losses on goodwill or to verify twice (or
more) a year whether impairment losses were generated. In this
context disclosure plays a key role for investors. IFRS 3 outlines
the accounting when an acquirer obtains control of a business
(e.g. an acquisition or merger) and groups have to disclose a
great deal of information as for example. the the acquisition and
the date it was acquired, the percentage of voting equity interests
acquired, the primary reasons for the business combination and
a description of how the acquirer obtained control of the acquire,
a qualitative description of the factors that make up the goodwill
recognized, such as expected synergies from combining
operations of the acquiree and the acquirer, intangible assets that
do not qualify for separate recognition or other factors, etc.
There is a total number of forty key items in the IFRS 3
disclosure. IAS 36 defines that companies shall disclose, among
others, the carrying amount of goodwill allocated to the cash
generating unit (CGU), the basis on which the unit’s recoverable
amount has been determined, the discount rate applied to the
cash flow projections, etc.
We analysed a total number of eight key pieces of information
with reference to IAS 36.are eight. Many studies have been
conducted on the quality of voluntary disclosure and the results
show that the disclosure index is very low. Thus, our paper aims
at verifying if, first of all, the mandatory disclosure is shown in
the notes of the consolidated financial statement with reference to
IFRS 3 and IAS 36 by using the Dscore according to Cooke [1].
Secondly, the aim of the paper is to analyze the determinants that
influence the quality of the Dscore by means of multiple
regression models. We defined the Dscore as an independent
variable and several dependent variables (as Revenues, total
assets, etc.) according to previous studies. Results show that not
all the groups disclosed the items required by the international
accounting standards examined. Furthermore, Leverage,
Revenues, Market Values and ROS are the main determinants
that influence the quality of disclosure.