The role of corporate governance in accounting discretion under IFRS: Goodwill impairment in Australia

A major concern with the adoption of International Financial Reporting Standards (IFRS) is the accounting discretion allowed under the IFRS, and its potential opportunistic use by managers. We examine the role of corporate governance in the accounting discretion inherent in goodwill impairment decisions under the IFRS. More specifically, we investigate whether, in Australia, stronger governance strengthens associations between economic factors and goodwill impairment loss but weakens associations between contracting incentives and goodwill impairment loss. Using data from 2007 to 2012, we find evidence consistent with the notion that stronger governance enhances the associations between economic factors and goodwill impairment loss. However, we find that strong governance cannot completely eliminate the opportunistic use of discretion in an impairment decision, especially when pre-impairment income is negative, and when the impairment occurs in the first year of a CEO's tenure. Our results are robust with regard to alternative measures of the dependent variable, firm performance variables, and the governance variable, even after controlling for potential self-selection biases.