Beyond standards: how culture and institutions shape goodwill impairment under IFRS
Mariam Alsabah, Ahmad AlshehabiPurpose
This study aims to investigate the simultaneous influence of national cultural dimensions and institutional quality on the magnitude of goodwill impairment losses under International Financial Reporting Standards (IFRS), extending the literature by integrating formal and informal institutional determinants within a unified empirical framework and addressing a pervasive but overlooked collinearity problem in prior institutional proxies.
Design/methodology/approach
Using a sample of 2,466 companies (14,898 firm-year observations) drawn from 17 IFRS-adopting countries over 2007–2013, the study estimates a pooled Tobit model with year and industry fixed effects. Cultural dimensions follow Hofstede (2001). Institutional quality measures are drawn from Alshehabi et al. (2021), who rigorously tested these measures for reliability and validity using a 70-country sample.
Findings
Goodwill impairment losses are associated with both firm-level economic factors and managerial reporting incentives. Power distance and individualism exert direct effects on impairment amounts in the predicted direction. Contrary to expectations, uncertainty avoidance is positively associated with impairment, consistent with an income-smoothing interpretation. Institutional quality – particularly quality of legality and equity market development – is positively associated with impairment magnitude, consistent with stronger institutions constraining opportunistic deferral. Moderation analyses reveal that institutional quality attenuates the sensitivity of impairment to goodwill carrying values, and that firms in stronger institutional environments report impairment losses more closely reflecting underlying economic conditions. Cluster analyses confirm these patterns systematically across institutional and cultural country groupings.
Research limitations/implications
The study relies on firm-level rather than Cach Generating Unit-level data, and the sample period is bounded by the availability of the validated institutional measures of Alshehabi et al. (2021). The findings establish a pre-European Securities and Markets Authority enforcement baseline against which the effects of post-2014 regulatory interventions on goodwill impairment practice can be assessed in future research.
Practical implications
The findings demonstrate that goodwill impairment under IFRS is not purely an accounting issue but one conditioned by the institutional and cultural environment in which firms operate. Revising accounting standards alone is insufficient to achieve de facto comparability; effective and consistent enforcement across jurisdictions remains essential. Investors, analysts and regulators should consider the institutional and cultural context when interpreting goodwill impairment disclosures across countries.
Social implications
The study highlights that inconsistent goodwill-impairment practices across countries can undermine public trust in financial reporting and weaken confidence in global capital markets. When impairment decisions reflect managerial discretion rather than economic reality, stakeholders such as employees, small investors and pension funds, may be misled about firms’ true financial health. Stronger institutional environments promote more transparent reporting, supporting fairer investment decisions and reducing information asymmetry. The findings therefore underscore the societal importance of robust legal systems, effective enforcement and ethical reporting cultures. Enhancing these elements can contribute to greater market integrity, improved investor protection and more equitable economic outcomes across jurisdictions.
Originality/value
This is the first study to jointly examine formal and informal institutional determinants of goodwill impairment under IFRS. It makes a methodological contribution by using the validated institutional quality measures of Alshehabi et al. (2021), which explicitly address the pervasive collinearity problem in prior institutional proxies – a limitation that has been systematically overlooked in international accounting research – and demonstrates that both culture and institutions are substantively, not merely statistically, important determinants of goodwill impairment reporting.