Characteristics of an Asset

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Methodology

There are two types of research strategies that writers on methodological issues general-ly differentiate between, namely qualitative and quantitative. The choice of strategy de-pends on the nature of the research question that the investigator tries to answer and un-der certain circumstances a combination of both is preferred (Bryman, 2012).

Research Strategy

Studies with a quantitative research strategy tend to stress the quantification in the data collection and analysis. This is different from the qualitative research strategy, where a greater focus is put on the interpretation of the words in both the analysis and collection of data, to grasp the whole picture. The quantitative strategy usually has a deductive na-ture, which implies that an established theory is used in the formulation of the hypothe-sis and which impacts the data collection. Depending on the outcome of the research, the hypothesis is either confirmed or rejected. In contrast, the qualitative strategy gener-ally takes an inductive nature, which implies that a theory is formulated based upon the findings (Bryman, 2012).
This study has a quantitative research strategy with a deductive nature. The report aims at investigating companies´ compliance with the disclosure requirements in IAS 36, paragraph 134, where companies´ annual reports serves as the main information source for the collection of data. In addition, an examination of different variables that might affect the disclosure level will be carried out. Due to the nature of these research ques-tions, the emphasis is put on the quantification rather than interpreting the words in the annual reports. The examination of the financial reports only intends to answer whether companies comply with the specific requirements or not and therefore, the study does not seek to gather nor analyzing information beyond this level. A deeper understanding of the revealed information is not of interest, the focus is instead to assess if the good-will impairment notes contains the required information. Moreover, the report is consid-ered to have a deductive nature as theory is connected to the findings.

Research Method

Sample Selection

The research is interested in observing whether large-, mid- and small cap companies in Sweden disclose the required information regarding goodwill impairment. Therefore, the sample was derived from NASDAQ OMX Stockholm´s three different lists. Com-panies were gathered from the database Retriever Business, where all companies in Sweden are ranked in terms of turnover. The investigation period covers the years 2005-2013, since the annual reports for the year 2014 were not available for all companies in the beginning of the investigation. Thus, one of the requirements was to have a recog-nized goodwill item in the balance sheet during this period. An examination of compa-nies’ annual reports were performed in order to identify whether the entities had recog-nized a goodwill item or not and in cases were no goodwill item was found, the entities were excluded. Additionally, the financial reports were expected to be prepared in ac-cordance with the framework of IFRS to be considered as relevant. A further criterion was to have annual reports available for the public, when the reports were missing, companies were omitted from the study. Those that were not listed during the entire in-vestigation period were not taken into account, this also applies to firms with broken fiscal years since that would imply partial compliance with IAS 36 in year 2005.
When companies were considered as inappropriate the next largest firm replaced them. This selection process proceeded until a complete sample was obtained, including the ten largest entities within each list, with consideration to the requirements stated above. The final sample for the entire investigation period is presented below in table 3.1.

Collection of Data for the Main Research Question

The data for the main research question, regarding the compliance with the standard, was solely gathered from the firms’ annual reports. The database Retriever Business served as the primary information source since it possesses an extensive access to com-panies’ financial reports and other company information. In cases where the financial reports were missing in the database, the reports were gathered directly from companies’ websites. When reviewing the financial reports, the emphasize were put on the notes of goodwill impairment and if the entities referred to other important notes related to goodwill impairment, these notes were reviewed and considered as well. In order to ensure that proper information was gathered and that a consistent examination of the notes was performed, a disclosure checklist was used during the entire data collection process. The disclosure checklist is described in detail in section 3.2.4. The data gath-ered for the main research question was processed and entered into a scoreboard, which is explained in the following section.

Scoreboard

Scoreboards were constructed to assess the compliance level for each of the firms. Each scoreboard consists of two axes and is a table that illustrates companies´ scores for each disclosure criteria. The data that was derived from companies’ annual reports was en-tered into these scoreboards, using the computer software Excel. The tables provided an overview of companies´ disclosures and enabled for an evaluation of the compliance level. Separate scoreboards for each year were constructed, with the company names on the vertical axis and the disclosure requirements on the horizontal axis. IASB´s latest list of disclosure requirements, in 2015, regarding goodwill impairment, was interpreted and served as a disclosure checklist for this study. The disclosure checklist consisted of 7-12 requirements, including two recently added criteria. Since year 2013, IFRS made it mandatory to inform about the fair value hierarchy as well as the alternative methods used in the valuation.
The number of criteria, that the companies were expected to follow, varied within the sample, mainly due to two aspects. The first aspect concerns which basis that has been used in the calculation of the recoverable amount. Another decisive factor in determin-ing the number of criteria were whether firms have recognized an impairment loss dur-ing that specific year or not.
Companies were assigned with one point when they succeed in presenting a mandatory disclosure requirement of IAS 36. However, when the entities failed to meet a certain disclosure criteria, they were assigned with zero points. The number of applicable re-quirements varied within the sample and it was therefore necessary to indicate the crite-ria that were not applicable. The non-applicable requirements were denoted with NA in the scoreboard. Moreover, partial compliance with the requirements was common for some companies, however, a score of one or zero was not considered to be representa-tive. It was more fair to indicate this scenario with the sign *, which demonstrates the partial compliance. The sign * were not taken into account when adding up the total scores. The purpose with the sign * were to visually demonstrate and convey the partial compliance to the readers. The scores obtained by each of the companies were added up and presented in a separate column on the horizontal axis of the scoreboard. The scores were converted into a percentage to be able to make a fair comparison of the companies. If the precise numbers had been used, it would be difficult and unfair to compare them with each other, when different number of disclosure criteria has been applicable. The scoreboards were divided into three categories, representing each list on the Swedish stock market. All the scoreboards can be found in Appendix 1-9.

Charts

The study is interested in observing the disclosure behavior over a nine-year period, which makes the use of charts appropriate, since it allows for a trend to be observed. The results obtained from the scoreboards were inserted into a chart to present the com-pliance level over time, which corresponds to the study´s main research question. The data that was entered into the charts represents the average disclosures levels for each year. However, if the variance in the numbers is significant, average numbers may be misleading since it does not show the spread. Therefore, tables with descriptive statis-tics were presented together with the charts, when necessary.
The use of charts also applied to the sub-questions of the study, which seeks to answer the impact of specific characteristics. Previously collected data has been used in the charts to the extent it was possible, however, additional company information was gath-ered from Retriever Business when necessary. In the charts that correspond to the sub-questions, average data was used to be able to see a trend over the investigation period. On the vertical axis of the diagrams, the compliance level was presented and on the hor-izontal axis, the year was stated. As a supplement to the charts, tables with descriptive statistics, presenting the mean-, median- and standard deviation numbers, were provided to avoid a distorted picture.

Collection of Data for the Sub-questions

The first sub-question, which examines whether the size (list) has an impact on compa-nies´ disclosure levels, was answered with the findings from the main research question. In this context, size refers to which list the company belongs. The findings from the main research question reflect the disclosure behavior of large-, mid- and small cap companies, which makes the results useful when examining the impact of the size (list) variable on the disclosure level.
The second sub-question examines the impact of three additional variables, namely the age, the audit firm and the industry. This type of variables required additional infor-mation to be gathered, since the findings from the main research question were not suf-ficient enough to answer the question itself. Information about companies´ ages, indus-tries and audit firms was collected from Retriever Business.

Multiple Regression Analysis

To enhance the reliability of the charts, a regression analysis was necessary to conduct. Regression analyzes are useful tools for testing the relationship between certain varia-bles. The analysis was performed as a complement to the charts and served as a statisti-cal confirmation for the outcomes. The test was essential to be able to confirm whether the variables were associated with the compliance level or not, since the diagrams runs the risk of being misinterpreted. The same data has been used for both the diagrams and the statistical test, which were gathered from companies´ annual reports. The regression analysis was carried out in the computer software SPSS and the data that were gathered for the diagrams were transferred to this program, to be able to test the relationship be-tween the compliance level and the specific company characteristics. The model com-prised of one dependent variable, namely the compliance level, and four independent variables, which are the size, the age, the audit firm and the industry. Bryman (2012) defines the dependent variable as a factor that is causally impacted by other factors and the independent variables as the factors that have a causal influence on other factors. By putting the dependent and the independent variables in relation to each other, a relation-ship might be observed.
The majority of the variables of this study were not in numerical values and it was therefore necessary to include several dummy variables to be able to perform this type of test. Non-numeric variables were indicated as dummy variables and this was the case for the size, the audit firms and the industry. Dummy variables are used when the test contains a factor that has two or more categories (John, Whitaker & Johnson, 2006). By treating size, audit firm and industry as dummy variables a relationship could possibly be observed, even though these factors contained different categories. Generally, dum-my variables are assigned with a numerical value of either 0 or 1 (John et al., 2006). The number of categories determined the number of dummy variables, since the number of dummy variables always needs to be one less. In cases where more than two categories were used, only one of them was assigned by 1 while the remaining ones were indicated by 0.
The statistical test is not intended to answer the sub-questions itself, but rather to con-firm the outcome of the charts. Therefore, the significance level has not been deter-mined at one level. Normally, a significant level of 0, 01, 0, 05 or 0, 10 is applied (Ber-enson, Levine & Krehbiel, 2012). However, in this study, the outcomes are compared at two different levels to see at what level the variables becomes significant and whether the findings of the test are consistent with the outcome of the charts. Variables with a p-value lower than of 0, 05 and 0, 10 have been considered. The p-value indicates how much the certain variable contributes to the model (John et al., 2006). The final model were constructed as follow:
Y = β0 + β1 Age + D1 Large Cap + D2 Small Cap + D3 EY + D4 PwC + D5 Deloitte + D6 Manufacturing
For the size variable, mid cap companies served as the reference for the two other cate-gories and for the audit firm variable, KPMG was the reference firm. In the case of the industry, non-manufacturing companies functioned as the basis for the comparison.

An Interpretation of IAS 36, paragraph 134

The assessment of companies´ disclosure levels was conducted by an interpretation of the requirements in IAS 36, paragraph 134. The interpretation of the requirements was converted into a disclosure checklist, which reflects how the examination of the goodwill impairment notes has been carried out. The disclosure checklist is presented in this section and in need of an increased understanding it is highly recommended to review the chapter Frame of References, section 2.2.2.
The following must be disclosed when a significant value of the carrying amount of goodwill has been allocated to a CGU (FAR Akademi, 2013):
A) The carrying amount of the goodwill that has been allocated to a CGU must be clear-ly stated. In cases where goodwill has been distributed to only one CGU, without providing any explanation of the appropriateness of this, companies received zero points. This was also the case when goodwill was not distributed to a CGU.
B) Excluded – Does not specifically address goodwill.
C) A presentation of the basis used when estimating the recoverable amount of the CGU was required. More specifically, whether the value in use or fair value less cost to sell has been applied. If the basis were not clearly stated during a certain year, no points were given and companies were assessed with the least number of requirements to make a fair judgment.
D & E) The following criteria concerns both companies that uses value in use and fair value less cost to sell in the estimation of the recoverable amount. When differences be-tween these two methods exist, this is indicated next to the criteria.
1. Entities must state the key assumptions that have been used as the basis for the cash flow projections. Key assumptions refer to those that the CGU´s recovera-ble amount is sensitive to. The application of wordings such as “other key as-sumptions or some of the important key assumptions” were indicated by the sign *, which stands for partial compliance. Further, when no assumptions were men-tioned, this resulted in zero points.
2. A description of how the values assigned to each key assumption has been de-termined as well as whether the values are consistent with prior events or exter-nal information sources is required. If the values are not consistent with any of these two, a motivation of why and how must be presented. When no description of the approach was provided, no points were allocated.
a) Companies that uses fair value less cost to sell as a basis for the CGU´s recoverable amount must present to which level the calculated value of the CGU belongs to in the fair value hierarchy. This criterion only relates to the year 2013. When entities did not mention the level to which the value of the CGU belongs to, no points were given.
b) If the valuation technique has changed, companies must justify the dif-ference in value as well as the reason for the change. This criteria does only concern those that uses fair value less cost to sell in the year 2013. When no information was provided regarding the valuation technique, this resulted in zero points. This were also applied when no explanation for the change were stated.
3. Information about the duration of the cash flow projection must be presented. In cases of intervals, the sign * were given, illustrating partial compliance. Periods of intervals does not tell the precise period used for a certain CGU, which ex-plains the *. When no period was mentioned, no points were assigned. Compa-nies that use the value in use method must further justify why a period longer than five years is appropriate, if this was the case. If a longer period were ap-plied without any justification, zero points were obtained.
4. The growth rate applied in the cash flow projections beyond the latest forecasts must be indicated in the note. If the growth rate is greater than the average long-term growth rate for that CGU´s industry or market, this must be explained. However, this only applies to the entities that use value in use. Growth rates stated in intervals were not considered to be fully complying and were denoted with the sign *. Notes without growth rates resulted in zero points.
5. Companies must inform about the discount rate that has been used in the cash flow projections. If the discount rate were not indicated for each CGU, neither one nor zero points were assigned, since this was considered as partial compli-ance, hence, indicated by *. No disclosures of the discount rates equaled zero points.
F) Regardless of which method the entities have used in their calculation of recoverable amount, a sensitivity analysis is required to be carried out, to see if there is a reasonable possibility of the key assumption to change and result in an impairment loss. If an im-pairment loss were recognized, the following disclosures were required:
1. How much the recoverable amount deviate from the carrying amount. When no difference was indicated, companies were assigned with zero points.
2. A presentation of the values of the key assumptions that could possibly change. If companies failed to inform about the current values of the key assumptions, no points were given.
3. Entities are required to state how much the key assumptions must change in or-der for the carrying amount to equal the recoverable amount. If the necessary change was not mentioned, zero points were allocated.

Quality of Method

Once the data has been collected it is essential to assess the degree of faithfulness of the data. The assessment involves to question the reliability and validity of the technique used (Burns, 2000). It is further necessary to evaluate the quality of the measures (Gra-ziano & Raulin, 2010).

Reliability

The word reliability is often associated with the adjectives dependable, accurate, honest, trustworthy, consistency. At its most basic level, reliability is about ensuring that pre-cise measurement tools are used in the research. The concept of reliability implies that under similar conditions, similar outcomes should be achieved, regardless of the fre-quency of repeated executions of the measures (Wrench, Thomas-Maddox, Peck Rich-mond, McCroskey, 2013). The degree of reliability is decided by two components, namely how the measurement has been carried out as well as how precise the data has been processed (Holme & Solvang, 1997). By minimizing the errors in the measure-ments a greater reliability is obtained (Burns, 2000).
This study examines companies´ annual reports, which includes an interpretation of the goodwill impairment notes. Reviewing the notes involved subjectivity, which was an inherent element in the process. In order to minimize the subjectivity in the process, a disclosure checklist was developed to serve as an interpretation tool for the data collec-tion. This increased the transparency and consistency of the data gathered.

Table of Contents
1 Introduction
1.1 Background
1.2 Problem Discussion
1.3 Research Questions
1.4 Purpose
1.5 Delimitations
1.6 Thesis Outline
2 Frame of References
2.1 Characteristics of an Asset
2.2 Goodwill
2.3 Qualitative Characteristics of Accounting
2.4 Previous Research
2.5 Disclosure Theory
3 Methodology
3.1 Research Strategy
3.2 Research Method
3.3 Quality of Method
4 Empirical Findings
4.1 The Findings of the Swedish Companies´ Compliance Levels
4.2 The Impact of Company Characteristics on the Compliance
4.3 Statistical Confirmation
5 Analysis
5.1 Compliance with the Standard
5.2 Reasons for Non-Compliance
5.3 Company Characteristics that Influences the Compliance Level
6 Conclusion and Discussion
6.1 Conclusion
6.2 Discussion
List of referenc
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