Recognition of provisional goodwill: Real need or communication strategy?

This study draws attention to the recognition of goodwill on a provisional basis, as allowed by International Financial Reporting Standard (IFRS) 3,‘‘Business combinations”. We examine whether the provisional goodwill choice is motivated by market imperfections rather than the actual difficulty in the estimation of acquired assets and liabilities. We analyze a sample of business combinations concluded over the period 2014–2015 involving European companies and accounted for according to IFRS 3. Our findings suggest that the decision to account for goodwill on a provisional basis is due to the specific timing of the acquisition. In addition, the coexistence of stock market overvaluation and strong investor protection at the time of the merger and acquisition (M&A) announcement is a significant determinant of the provisional goodwill choice. Therefore, this study contributes to the current debate on accounting for goodwill as it highlights the relevance of the factors affecting the initial determination of the goodwill amount.