Do Goodwill and Its Impairment Write-offs Predict Future Cash Flows Under the IFRS Regime?

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This paper aims to examine the abilities of goodwill and its impairment write-offs in predicting future expected cash flows. Using a sample of Korean listed firms which reported a positive goodwill balance during the period of 2011 to 2014, we observe positive associations between goodwill balance, impairment write-offs, and up to two-year-ahead cash flows from operations. However, we find that the association between goodwill and future expected cash flows turns negative when we focus on firm-years reporting impairment write-offs, for which the positive association between goodwill impairment write-offs and future cash flows is more pronounced. In additional analyses, we separate impairers into normal versus discretionary impairer sub-samples, and compare firms-years reporting impairment write-offs on a discretionary basis against normal counterparts. The analysis reveals that discretionary impairment recognition tends to amplify the ability of goodwill balance and goodwill impairment write-offs to predict future expected cash flows with negative and positive relations respectively. These findings are consistent with the notion that while goodwill balance has the attributes of an asset in general, there are rooms for managers to exercise discretion in recognizing impairments, and they tend to report impairment write-offs to convey private information on positive future performance in the Korean context.