Study On Relevance Of Purchased Goodwill And Future Cash Flows Of A-share Non-financial Listed Companies In China

Recently, Chinese enterprises have been actively involved in mergers and acquisitions(M&A), and A-share listed companies, the vital player in capital market, also had frequent M&A activities during these years. According to the WIND DATA, M&A cases happening in A-share market increased from 580 in 2012 to 2,902 in 2015 with average annual growth rate of 71.04%, while the takeovers, which account for over 50%, increased from 467 in 2012 to 1,609 in 2015 with average annual growth rate of 51.04%. According to Chinese Accounting Standard(CAS 2006), for the business combinations not under common control, goodwill should be recognized as the excess of the consideration over the fair value of the acquiree’s identifiable net assets acquired by the acquirer, which is purchased goodwill. Thus, the rapid development of M&A market results in more enterprises with more goodwill recognized.In reality, the combinations are often overprized because of the expected performance improvement and the information asymmetry. However, many annual corporate reports and security analysts’ reports indicated that, a large number of overprized business combinations don’t hit the previous expectation, and the post-M&A financial conditions always deteriorate, which brings in goodwill impairment risk at high level. Many researchers hold a view that the goodwill impairment test induces the management discretion. There is a probability that the goodwill is impaired economically, but for protecting their personal benefits, the management may not recognize the impairment timely, and when the corporate bad performance becomes exposed to the public, they have no choice but to recognize the large amount of impairment at once, which results in the subjectivity and unverifiability of goodwill numbers. Then, some questions arise, that the goodwill impairment test is conducted properly by listed companies? They can faithfully reflect the expected inflow of economic benefits? The goodwill numbers are useful? They are relative to the future cash flows? The companies involved in Technology & Media & Telecom(TMT) industry and listed in ChiNext have frequent M&A activities, resulting in large amount of goodwill recognized in the balance sheet, but they are exposed to bigger operating risk, and their future cash flows are less stable, which will lower the usefulness of their goodwill numbers? These questions deserve profound research.This paper’s study is based on the annual financial reports from 2008 to 2014 of 1,168 Ashare non-financial listed companies in China which have positive goodwill numbers in any year from 2008 to 2013. First, this paper theoretically analyzes whether the current goodwill numbers can reflect the nature of goodwill, and what will damage the usefulness of goodwill accounting numbers. Then, to test the usefulness of the purchased goodwill, this paper conducts an empirical study on the relevance of goodwill numbers and future cash flows of listed companies. The results show that, firstly the goodwill numbers of A-share non-financial listed companies have significant positive relevance with future net operating cash flows, which supports that the goodwill number can reflect the economic nature of goodwill and is useful for predicting future cash flows and assessing the business prospect generally; secondly, as for the TMT companies and those listed in ChiNext, their goodwill numbers have insignificant positive relation with future net operating cash flows, which implies that, their goodwill numbers provide less useful information for predicting future cash flows.Based on the study above, the purchased goodwill of A-share non-financial listed companies in China is positively relative to future cash flows, and in general it’s useful for the information users to predict the entities’ future performance and assessing the enterprise value. Thus, this paper concludes that, the current CAS for goodwill accounting is rational; based on the cost and benefit principle of standard setting, the goodwill impairment test is still applicable. However, for TMT companies and those listed in ChiNext, the usefulness of their purchased goodwill information needs to be improved. It should also be noted that, few listed companies strictly comply with the disclosure requirements for purchased goodwill, so the current CAS execution should be enhanced in the future, which will strengthen the usefulness of goodwill numbers. At last, this paper provides some advice in the execution of CAS for goodwill, the supervision of listed companies and the M&A practice.