IFRS goodwill impairment testing in Malaysia: a compliance analysis

Prior to the adoption in 2006 of an International Financial Reporting Standard (IFRS)-based reporting framework in Malaysia, no binding standard governing goodwill had ever been implemented. The highly prescriptive and technical provisions of Financial Reporting Standard (FRS) 136 - Impairment of Assets (FRS 136) therefore represent a very substantial variation from past practice. This in turn gives rise to questions about how Malaysian companies and their auditors have fared during the process of transition to a complex new reporting regime and in consequence to the quality and consistency of reports produced pursuant to that new regime. Thus, this dissertation focuses specifically on compliance levels and disclosure quality relating to the highly detailed requirements set out in FRS 136. Using a two-tiered comparative/evaluative method, this thesis finds that 50% of the companies producing financial reports have failed to meet the mark for the new Standard. -- The research also examines the discount rate used in IFRS goodwill impairment testing. Discount rate selection represents a centrally material factor impacting valuation models owing to the strong reliance on discounted cash flow modelling as a basis for determining an asset's recoverable amount in the impairment testing process. The discount rates disclosed by large Malaysian companies are compared with independently generated discount rates and analysed using the Capital Assets Pricing Model and goodwill intensity. Evidence consistent with opportunism on the part of financial statement preparers was found. -- The application of FRS 136 was mandatory for all companies included in the research sample and subject to audit by the Big 4 (the Big 4) auditors. Yet the majority of companies failed to comply with even the basic requirements of the new goodwill Standard. This raised a question regarding the quality of audits provided by the Big 4. Hence, I examined the degree of technical compliance with the disclosure requirements of FRS 136 by a sample of large Malaysian listed companies used as a proxy for audit quality. This research employed six analytical structures to distinguish audit quality among the Big 4 in an attempt to question the homogeneity of audit quality assumption. No credible evidence was found in the dataset of meaningful variation in compliance levels or disclosure quality among the clients of the Big 4. Furthermore, there was a systemic failure on the part of Malaysian clients of the Big 4 to comply with even most basic elements of the FRS 136 disclosure framework in relation to goodwill impairment testing. The results of this research suggest that the performance of Malaysian companies and their auditors must improve before Malaysian practice is truly of international standard.