A Study On The Value Relevance And Reliability Of Goodwill

Merger and acquisition have become an important way of rapid expansion, which has played a crucial role in the development of modern enterprise. With the business combinations, goodwill has been the most debated and hottest topic both in practical and theoretical area. As the growing proportion of goodwill in assets, It's important for information users to make decisions by proper reporting and disclosure of goodwill. However, the problem of confirmation and recognition of goodwill engendered in combinations is not embodied in accounting standard and reflected as"consolidated price difference"for a long time until February 2006, the Ministry of Finance issued the new goodwill accounting standards which made a substantive provisions. Thus, how about the value relevance of goodwill? Has the new accounting standards improved the value relevance of goodwill? This paper research the value relevance of goodwill form business activities and market value of the enterprise aspects. At the same time, this paper also research the reliability of goodwill.In terms of the relevance between goodwill and business activities, this study find that goodwill with the sample of year 2004-2006 has nothing to do with main operating profit, while the goodwill with sample of year 2007-2008 is positive with main operating profit, it's value relevance. This indicates that new accounting standards improves the value relevance of goodwill. After abandon 2004-2006 set of samples due to the irrelevance of goodwill and divide 2007-2008 set of samples into subsamples with goodwill and impairment, the test results of the two subsamples both indicate that goodwill has a significant positive correlation value.In terms of the relevance and reliability between goodwill and market value of the enterprise, this study find that goodwill with the sample of year 2004-2006 has nothing to do with market value, while the goodwill with sample of year 2007-2008 is positive with market value. This indicates that new accounting standards improves the value relevance of goodwill. On this basis, the paper examines the reliability of goodwill with the sample of year 2007-2008 furtherly, the result shows that goodwill has been underestimated for 1 yuan book value equals to 7 yuan in capital market. The result of subsample with goodwill is consistent with pooled sample. However, the result of subsample with impairement is no longer positive with market value, but negative correlated with market value, What's more, impairment has nothing to do with market value.Overall, not only form business activities but also market value aspects, this paper find goodwill is not value relevance under old accounting standards, while goodwill is value relevance under new accounting standards, this indicates that new accounting standards improves the value relevance of goodwill. What's more, this paper find that goodwill has been underestimated, it's not value reliability.