Journal of Accounting Review  2019/07
Vol.69   83-129
DOI:10.6552/JOAR.201907_(69).0003

The Study on Value Relevance of Goodwill and Bargain Purchase Gains after Adoption of IFRS: Evidence from Taiwan

Abstract

All Taiwan listed companies fully adopt IFRSs since 2013. Applying IFRS 1, business combinations (IFRS 3) is one of the exceptions to the retrospective application of IFRSs, therefore reported goodwill involves the information based on ROC GAAP 25 and IFRS 3 simultaneously after 2013. Using hand collected information for the components of goodwill from the footnote disclosures of financial statements, we examine the differences in the valuation of goodwill, reported according to two different accounting standards (IFRS 3 and ROC GAAP 25), by investors. Moreover, we examine the value relevance of bargain purchase gains.
The empirical results show the followings: (1) the goodwill measure under IFRS 3 is significantly more value relevant than that under ROC GAAP 25. Furthermore, because the information of goodwill components is presented in footnote disclosure of financial statements, this finding shows that investors understand and take into account the valuation implication of the disclosures examined; (2) bargain purchase gains are significantly and positively value relevant in both the valuation model test and the return model test. In sum, our results show that the fair value accounting for business combinations (under IFRS 3) is more value relevant than the more conservative goodwill accounting (under ROC GAAP 25), which supports the arguments stated in IFRS3 by the IASB.