Accounting For Assets Impairment: Creative Impairment Strategy On Discount Rate Disclosure

Discount rates selection represent a centrally material factor impacting in goodwill
valuation decisions. This study examines the consistency of opportunistic behavior in
documenting the variances between discount rates used by companies and
independently generated estimates of company specific, risk-adjusted discount rates.
This study examines the selection of 20 top listed companies on Bursa Malaysia that
have released their 2010 and 2011 annual reports with reported goodwill and
analyzed using the CAPM and goodwill intensity. The dominant pattern was for
observed discount rates to be lower rather than higher than the estimated value, with
15 (75%) companies of the 20 both in 2010 and 2011 in excess of 150 bps lower than
independent risk-adjusted estimate. Therefore, the data provided evidence of the use
of aggressively low discount rates, with the result that CGU asset portfolio
recoverable amount values will have been overestimated and potential goodwill
impairment losses deferred or avoided.