资源描述
Goodwill Accounting and Performance MeasurementWolfgang Schultze *Andreas Weiler *niversity of Augsburg, GermanyMay 15, 2009ForthUcoming in: Managerial FinanceSpecial Issue on Asset ImpairmentAbstract:Purpose This paper outlines the link between value creation, performance measurement and goodwill accounting according to IFRS and US-GAAP. Since economic goodwill is identical to the present value of future residual income, we examine the question of how accounting information gathered for impairment testing of goodwill according to IAS 36 and FAS 142 can be used for internal control purposes.Design/methodology/approach The paper adopts common assumptions in the literature of residual income based valuation and analytically derives a periodic performance measure of both value creation and its afterward realization based on information available from impairment testing.Findings This paper shows that information required by IFRS and US-GAAP to evaluate a firms goodwill can be used to design a performance measurement system which provides information about both value creation and afterward realization of value.Practical implications From a practical perspective, we show that appropriate adjustments of the data used for impairment testing result in information which ideally fits the requirements for an optimal performance measurement system.Originality/value The paper presents a performance measure which provides information about the actual creation of value as well as its afterward realization in a period and therefore is superior to traditional residual income based performance measures.Keywords Goodwill, Impairment Only Approach, Performance Measurement, Value Based Management11. IntroductionTheimpairment-only-approachtogoodwillaccounting requires anannual determination of the value in use of the reporting units or cash generating units of a business. IAS 36.80 and FAS 142.30 require goodwill to be allocated to cash generating units resp-reporting units which benefit from the business combination and which represent the lowest level within the entity at which the goodwill is monitored for internal management purposes. Obviously, there is a link between goodwill allocation and internal management. Goodwill is monitored internally in order to achieve the benefits of the acquisition that were planned for initially. As the impairment-only-approach is quite costly in its application, the question arises whether the information gathered in its process can be used for managing the success of the acquisition and controlling the performance of these units, that is, measuring and rewarding management performance.From an economic point of view, goodwill is the surplus over a firms net asset value and therefore identical to the net present value of an investment. As such, goodwill is also identical to the present value of future economic rents or residual income (Ellis, 2001). Residual income is an important performance measure in value based management. As the value of goodwill is based on the present values of future residual income and so is value based management, a close link between the two exists. In the process of impairment testing, goodwill is evaluated and this valuation is verified by external auditors. As such, the resulting numbers may well be used for internal measurement and reward procedures. In this paper, we therefore analyze the question on how the information gathered for impairment testing can be used for measuring and rewarding management performance in order to meet the goals of the acquisition and preserve shareholders interests.The main function of a performance measurement system is to provide information for managers to make economic decisions and to induce them to act in the interest of the shareholders (Demski and Feltham, 1976). Managerial decision-making not only requires forward-looking information, but also backward-looking performance measures which indicate the necessity as well as the direction of corrective action. A performance measure is used to judge the performance of a given period. It is used as an indicator of the success during that period and is compared to earlier projections in order to reveal the necessity of corrective action. Those measures are at the same time used by principals to evaluate the performance of agents (stewardship function). Managers anticipate the way they are12 evaluated at a later point in time when they make their decisions. Consequently,Performance measures need to provide for this and induce the manager to act in the bestInterest of shareholders. This is the reason for the prominent role which variants of residual income, such as economic value added (EVA), a trademark of Stern and Stewart, play: a manager will anticipate the expected future residual income generated by a particular decision, typically an investment decision. When the manager is evaluated or even rewarded based on residual income, he will make his decision dependent on the present value of residual income which is known to be identical to net present value (NPV) (Preinreich, 1937) 1. Therefore the managers decision will be consistent with the NPV- rule, as long as his discount rate and his time horizon are identical to the projects. This property of residual income is termed “goal congruence” in the literature (Reichelstein,1997).However, residual income of a particular period does not by itself indicate the value creation of the period. Therefore, the use of residual income for rewarding purposes may lead to myopic behavior by managers (OHanlon and Peasnell, 1998) when their time horizon is shorter than the projects 2. In addition, residual income does not provide information on the extent to which the initially planned value creation has been realized in the period. However, since economic goodwill is identical to the present value of future residual income and therefore to value creation, a close relationship between goodwill accounting and value based performance measurement exists.In this paper, we outline the link between value creation, performance measurement and goodwill accounting. We show that information required by IFRS and US-GAAP to evaluate a firms goodwill can be used to design a performance measurement system which provides information about both value creation and the afterward realization of value. Value creation means that the manager initiates projects with a positive net present value, which lead to increases in shareholders wealth. In contrast, value realization describes the success in the later implementation and realization of the planned figures. From the perspective of value based management, we conclude that this performance measure is superior to standard residual income performance measurement. As a consequence, the information needed for external reporting purposes can also be used for internal decision- making. From a practical perspective, we show that appropriate adjustments to the data used for impairment testing result in information which ideally fits the requirements for an optimal performance measurement system. Hence, we contribute to the literature by23 showing how financial accounting information can be used in performance measurementsystems from both a theoretical and a practical perspective.The remainder of the paper is organized as follows: In the following section, we review related literature and outline the aim of the paper. In section 3, we analyze properties of optimal value based performance measurement systems. In this context, we describe the link between residual income and value creation based on the analysis of OHanlon and Peasnell (2002). In particular, we develop a periodic measure which provides information about both value creation and its afterward realization. In section 4, we discuss the use of goodwill accounting information according to IFRS and US-GAAP to calculate this measure. We conclude with a summary.2. Related literatureAccording to the IASBs framework, the principal objective of financial statements is “to provide information about the financial position, performance and changes in financial position of an entity that is useful to a wide range of users in making economic decisions” (IASB-F 12). Similarly, the major objective of financial reporting in FASBs framework is to provide information “that is useful in making business and economic decisions” (CON1.33).From a practical perspective, the question arises whether the information provided for financial accounting purposes can also be used for performance measurement.The discussion on the different functions of accounting and the use of financial accounting for management accounting purposes has a long tradition. Theoretical research has examined the stewardship versus valuation role of accounting information from the perspective of information economics. Particularly, the question is analyzed whether information needed for investors to value firms coincide with information required for performance measurement. Within an agency-framework, Gjesdal (1981) shows that decision usefulness and stewardship are distinct functions of accounting. Consequently, the literature is critical about the use of information relevant for decision making in performance measurement systems used for stewardship purposes (i.e. Lambert, 2001).Although theoretical research recommends the use of distinct accounting information for different purposes, this result is not empirically valid in practise. Bushman et al. (2006) find that valuation earnings coefficients and compensation earnings coefficients are related empirically. That is, the information content of earnings from both a value relevance and a34 performance evaluation perspective is positively related. Additionally, based on the agency-framework provided by Gjesdal (1981), Bushman et al. (2006) show that simple adjustments to the model assumptions lead to a situation in which information requirements of shareholders and managers coincide. Hence, they conclude that accounting information used by investors to value the firm can also be optimal from the perspective of stewardship. Consequently, researchers have started to analyze the links of financial reporting regimes with the informational properties of optimal managerial accounting systems (Hemmer and Labro, 2008; Scholze and Wielenberg, 2007).Performance measures based on accounting information play an important role in both financial and managerial accounting. In theory as in practice, residual income is often seen as an indicator for value creation from the perspective of shareholders. Unfortunately, the residual income of a single period does, in isolation, not provide an answer to the problems of decision making and stewardship. In this context, the question has been raised whether residual income is able to explain changes in stock values and therefore provide information about actual value creation. A number of studies examine the correlation between market values and EVA as well as other versions of residual income. However, their results are contradictory. For instance, Liang and Yao (2005) examine the value relevance of EVA in the Taiwans Information Electronic Industry resulting in a correlation of 13.47% between stock price and residual income as the performance measure. In contrast, in a 10-year-study by OByrne (1996), EVA exhibits a correlation to stock prices of 74%. As a consequence, Biddle et al. (1997) point out that earnings outperform EVA in most cases. Residual come is therefore not an ideal periodic performance measure. Its connection to value does not exist in a single period, the link only exists in a dynamic context.As a consequence, the use of residual income in incentive schemes may lead to myopic behavior by managers. In order to provide managers with incentives to act in the best interest of the owners, a periodic connection between residual income and value is sought for (so-called strong goal congruence). The literature analyses accounting rules regarding their ability to achieve strong goal congruence (e.g. Baldenius and Reichelstein,2005; Dutta and Reichelstein, 1999, 2002, 2005; Dutta and Zhang 2002; Mohnen and Bareket, 2007; Pfeiffer and Schneider, 2007; Reichelstein, 1997, 2000; Rogerson, 1997; Wagenhofer, 2003). As a result, special accounting rules such as the relative benefit depreciation-scheme are required to achieve strong goal congruence. In general, accounting45 rules are considered goal-congruent, when a project with positive NPV results in a positiveexpected residual income in any period. The manager will then have a strong incentive toaccept the project. To the contrary, an accounting rule that results in negative residual income in earlier periods may lead to under-investment.In this context, Schultze (2005) examines the information content of goodwill impairments under FAS 142. He concludes that impairment can be due to several reasons, not only to a deteriorating economic performance. In particular, the adaption of information which results from impairment testing may have undesirable effects on managements decisions. Due to its negative effect on income, the goodwill impairment may lead to a discrimination of economically viable projects. In particular, he shows that in some cases goodwill impairments result from purely technical reasons. An impairment loss will occur when investing activities, increases in the fair values of assets or newly created intangible assets, increase the fair value of net assets. Consequently, goodwill accounting information has to be treated carefully in the context of performance measurement.As a consequence, the use of residual income for measurement as well as for rewarding purposes is critical. The reason lies in the missing connection between the value creation of a particular period and residual income of that period. In view of this deficit, OHanlon and Peasnell (2002) establish the missing link between residual income and value creation 3. They present a joint measure of value creation and value realization, termed excess value created (EVC) as a measure of the managers success in these tasks (Ohlson 2002). EVC consists of two components, promised goodwill (GW) and realized goodwill. Promised goodwill is considered the result of an infinite series of excess returns (Johnson and Petrone, 1998) and therefore is equivalent to the present value of the expected future residual income. Realized goodwill is identical to all residual income (RI) earned and accumulated to date t, accrued at the discount rate EVC thus includes the value generation which has already been realized and the value creation which was initiated but is still to be realized in the future. In other words, a segregation of the past and the future part of value creation is achieved (Ohlson, 2002). Inso doing, OHanlon and Peasnell (2002) provide the link between goodwill accounting and56performance measurement. Similarly, Ellis (2001) shows that a performance measurereflecting value creation is related directly to economic goodwill. However, a positive EVCdoes not imply that value was created in the period. EVC is not a periodic measure of value creation, and it also does not provide information about the afterward realization of value. For a performance measures to indicate the necessity of corrective action, it needs to indicate the extent to which the initially planned value creation has actually been realized.In the next section, we describe the design of a performance measurement system that links goodwill accounting and the desirable properties described above. In section 4, we critically discuss the use of accounting information gathered for impairment testing according to IAS 36 and FAS 142 for this performance measurement system.3. Performance-based evaluation of GoodwillIn the following, we present a measure which shows both the newly created value and the extent to which the initially planned value creation has been realized. We show that this performance measure has two main components: residual income and goodwill. Since all figures are calculated on the level of reporting units or cash generating units, the resulting performance measure can additionally be used for performance evaluation purposes of divisional managers. We apply our measure to a numerical example in order to demonstrate its properties.3.1.Residual Income, Goodwill and Value CreationAs a starting point, we take on the perspective of shareholders. From their perspective, the outcome of the firm consists of increases in the share price, dividends, options etc., i.e. the so-called “total return to shareholders (TRS)”:TRS t= D t + Stwhere St denotes the stock price at date t. In case of distributing the profits, dividends can be approximated by free cash flows (FCF), which is operating cash flows less investments. The shareholder receives the FCF and has to accept a decrease in firm value. If earnings are retained he does not receive dividends but an increase in firm value. Thus, both cases can be expressed by the TRS, i.e. the sum of the dividends (D) and the change instock price (S).67Consistent with OHanlon and Peasnell (2002), we assume that cash flows occur at discrete intervals at the end of each period. For simplicity, we abstract from debt financing 4. Further, we assume the “clean-surplus-relation” to hold 5. That is, all changes in book values during a period are reflected in that periods accounting income or in the periods net distribution to shareholders:Bt Bt 1 = I t D twhere Bt denotes the book value of equity at date t. It is the accounting income and Dt denotes the net distribution to shareholders at date t. Residual income as a measure of accounting income in excess of a required return on capital employed is central to this discussion. As a consequence, it only answers the question whether profits exceed thefirms cost of capital r. It is therefore given by:RI t= I t r Bt 1The costs of capital are equal to the alternative investment-opportunities of the owners. Thus, it is irrelevant to the investor if the surpluses are actually distributed and reinvested by him or if the firm retains and invests the surpluses. Consequently, if a value based performance measure is to provide information about the additional value created from the perspective of shareholders, it needs to capture both the increase in firm value and the distributions to shareholders.TRS as a performance measure is typically used for the external measurement of profitability of a share ownership, consisting of the gain in share price and the dividends. To make use of this measure internally, we need to replace external by internal measures, assuming that intrinsic valuation adequately represents the valuation on the capital market. The conversion of internally generated fundamental firm value into market value is influenced by additional effects. These effects, like capital market communication and information processing, require their own management. By comparing internal and external value generation, differences can be identified, which possibly result from a poor communication with the capital market. For internal control purposes, stock prices St are substituted by the intrinsic value Vt which is formally given bysVt = B t + E t RI t +s (1 + r )= B t + GWt ,s =178 where GWt denotes t
展开阅读全文