Nichanun Panacha

Victor Wiklund

The Associations between the Goodwill Impairments and

the External and Internal Economic Indicators

Business Administration

Master’s Thesis

15 ECTS

Semester: Spring 2015

Supervisor: Johan Lorentzon

i

Acknowledgement

First of all, we would like to express our deep gratitude to Johan Lorentzon, our thesis

supervisor, for his valuable and constructive guidance and suggestions during the

planning and development of this thesis. His willingness to generously give his time

has been very much appreciated. Also, we would like to thank all other professors and

all administrative staff at Karlstad University, who have encouraged and inspired us

to conduct this work, as well as the companies and organizations, who have provided

the additional information and data.

Moreover, our completion of thesis could not have been accomplished without the

supports, encouragements, and motivations from our families and friends, and also the

meaningful and inspiring ideas, especially during the thesis seminars, from the fellow

students.

Karlstad, Sweden 2015-06-02

Nichanun Panacha Victor Wiklund

ii

Abstract

After the adoption of IFRS 3 and IAS 36 in 2005, goodwill and its related impairment

have been criticized recently about their reliability and the true presentation of the

economic value on the company’s financial statements. The valuation of goodwill and

its impairment were subjected to an idea of the earnings management, where the

management of the company subjectively decided the values to be realized,

especially, the value of goodwill impairment that was criticized and questioned about

its association with economic impairment indicators. However, this is in contrast with

the purpose of IAS 36 on enhancing the fair presentation of the goodwill’s value, and

the requirement that the company should consider and follow the economic

impairment indicators while evaluating the goodwill impairments.

The purpose of this study is to examine the association between the goodwill

impairments, which were recorded by the listed telecommunication companies in

Sweden (NASDAQ OMX Stockholm) during the year of 2005 to 2014, and the

external and internal economic indicators. The Swedish listed telecommunication

companies on NASDAQ OMX Stockholm were selected for this study with the

reason that the companies in telecommunication industry have more possibilities to

face with higher risk of impairment due to the high value of recorded goodwill.

Moreover, the data was collected from information available on the company’s annual

reports, and the discussion was based on the usages of tables and diagrams.

Consequently, the results of this study have revealed that the values of goodwill

impairments recorded by the selected companies did not associate with the external

and internal economic indicators during this ten-year period. Additionally, this lack of

association between these variables could also be explained by the ideas of agency

theory and earnings management.

Keywords: IFRS 3, IAS 36, goodwill, goodwill impairment, economic impairment

indicators, association, telecommunication industry, agency theory, earnings

management.

iii

List of Abbreviations

CGU Cash Generating Unit

DCF-model Discounted Cash Flow Model

ESMA European Securities and Markets Authority

GDP Gross Domestic Product

IAS International Accounting Standards

IASB International Accounting Standards Board

IFRS International Financial Reporting Standards

ROA Return on Assets

SEK Swedish Krona

SFAS Statement of Financial Accounting Standards

TAS Thai Accounting Standards

US GAAP Generally Accepted Accounting Principles (United States)

iv

Table of Contents

Acknowledgement……………………………………………………………….. i

Abstract………………………………………………………………………….. ii

List of Abbreviations……………………………………………………………. iii

List of Tables…………………………………………………………………….. vi

List of Figures…………………………………………………………………… vii

List of Appendices.................................................................................................. viii

1. Introduction…………………………………………………………………… 1

1.1 Problem Discussion……………………………………………………….. 2

1.2 Research Purpose………………………………………………………….. 4

1.3 Research Question………………………………………………………… 4

1.4 Structure of the Study……………………………………………………... 4

2. Background…………………………………………………………………… 6

2.1 IFRS 3 Business Combinations…………………………………………… 6

2.2 IAS 36 Impairment of Assets……………………………………………... 7

2.2.1 Indications of Impairments…………………………………………... 7

2.2.2 Measurement of Recoverable Amount………………………………. 9

3. Theoretical Framework and Prior Research..……………………………… 12

3.1 Impairment Indicators…………………………………………………….. 12

3.1.1 External Economic Indicators of Impairments………………………. 12

3.1.2 Internal Economic Indicators of Impairments……………………….. 14

3.2 Agency Theory……………………………………………………………. 15

3.3 Earnings Management…………………………………………………….. 17

4. Research Methodology……………………………………………………….. 20

4.1 Choice of Method…………………………………………………………. 20

4.2 Sample Selection………………………………………………………….. 21

4.3 Data Collection……………………………………………………………. 22

4.3.1 Goodwill and Goodwill Impairments………………………………... 23

4.3.2 External Economic Indicators……………………………………….. 24

4.3.3. Internal Economic Indicators……………………………………….. 25

4.3.4 Discount Rates and Growth Rates…………………………………… 26

4.4 Data Analysis……………………………………………………………… 27

v

4.5 Research Quality………………………………………………………….. 28

5. Empirical Results……………………………………………………………... 30

5.1 Goodwill and Goodwill Impairments……………………………………... 30

5.1.1 AllTele AB…………………………………………………………... 30

5.1.2 DGC One AB………………………………………………………... 31

5.1.3 Millicom International Cellular SA………………………………….. 32

5.1.4 Tele2 AB…………………………………………………………….. 33

5.1.5 TeliaSonera AB……………………………………………………… 35

5.1.6 Overall Goodwill and Goodwill Impairments……………………….. 36

5.2 External Economic Indicators…………………………………………….. 37

5.3 Internal Economic Indicators……………………………………………... 38

5.4 Discount Rates and Growth Rates………………………………………… 40

5.4.1 AllTele AB…………………………………………………………... 40

5.4.2 DGC One AB………………………………………………………... 41

5.4.3 Millicom International Cellular SA………………………………….. 42

5.4.4 Tele2 AB…………………………………………………………….. 43

5.4.5 TeliaSonera AB……………………………………………………… 44

5.4.6 Overall Discount Rates and Growth Rates…………………………... 45

6. Discussion……………………………………………………………………... 47

6.1 Associations between External Economic Indicators and Goodwill

Impairments……………………………………………………………………

48

6.2 Associations between Internal Economic Indicators and Goodwill

Impairments……………………………………………………………………

50

6.3 The Overall Associations and the Linkages of Agency Theory and

Earnings Management…………………………………………………………

54

7. Conclusions and Further Research………………………………………….. 57

7.1 Conclusions……………………………………………………………….. 57

7.2 Suggestions for Further Research…………………………………………. 58

Reference Lists…………………………………………………………………... 59

vi

List of Tables

Table 1 Goodwill and goodwill impairments recognized by AllTele AB during

the year of 2005 to 2014…………………………………………………………

30

Table 2 Goodwill and goodwill impairments recognized by DGC One AB

during the year of 2005 to 2014………………………………………………….

31

Table 3 Goodwill and goodwill impairments recognized by Millicom

International Cellular SA during the year of 2005 to 2014………………………

32

Table 4 Goodwill and goodwill impairments recognized by Tele2 AB during

the year of 2005 to 2014…………………………………………………………

33

Table 5 Goodwill and goodwill impairments recognized by TeliaSonera AB

during the year of 2005 to 2014………………………………………………….

35

vii

List of Figures

Figure 1 Goodwill and goodwill impairments recognized by the Swedish listed

telecommunication companies (NASDAQ OMX Stockholm) during the year of

2005 to 2014……………………………………………………………………...

36

Figure 2 External economic indicators during the year of 2005 to 2014 in

Sweden…………………………………………………………………………...

37

Figure 3 Internal economic indicators recorded by the Swedish listed

telecommunication companies (NASDAQ OMX Stockholm) during the year of

2005 to 2014……………………………………………………………………...

38

Figure 4 Discount rates and growth rates applied by AllTele AB during the

year of 2005 to 2014……………………………………………………………..

40

Figure 5 Discount rates and growth rates applied by DGC One AB during the

year of 2005 to 2014……………………………………………………………..

41

Figure 6 Discount rates and growth rates applied by Millicom International

Cellular SA during the year of 2005 to 2014…………………………………….

42

Figure 7 Discount rates and growth rates applied by Tele2 AB during the year

of 2005 to 2014…………………………………………………………………..

43

Figure 8 Discount rates and growth rates applied by TeliaSonera AB during the

year of 2005 to 2014……………………………………………………………..

44

Figure 9 Discount rates and growth rates applied by Swedish listed

telecommunication companies (NASDAQ OMX Stockholm) during the year of

2005 to 2014……………………………………………………………………...

45

viii

List of Appendices

Appendix 1 - Goodwill (MSEK) recorded by the Swedish listed

telecommunication companies (NASDAQ OMX Stockholm) during the year of

2005 to 2014………………………………………………………………............

64

Appendix 2 - Goodwill impairments (MSEK) recorded by the Swedish listed

telecommunication companies (NASDAQ OMX Stockholm) during the year of

2005 to 2014………………………………………………………………............

65

Appendix 3 - Summary of external economic indicators during the year of 2005

to 2014 in Sweden………………………………………………………………...

66

Appendix 4 - Sales (MSEK) recorded by the Swedish listed telecommunication

companies (NASDAQ OMX Stockholm) during the year of 2005 to

2014……………………………………………………………….........................

67

Appendix 5 - Operating cash flow (MSEK) recorded by the Swedish listed

telecommunication companies (NASDAQ OMX Stockholm) during the year of

2005 to 2014………………………………………………………………............

68

Appendix 6 - Earnings (MSEK) recorded by the Swedish listed

telecommunication companies (NASDAQ OMX Stockholm) during the year of

2005 to 2014……………………………………………………………………....

69

Appendix 7 - ROA recorded by the Swedish listed telecommunication

companies (NASDAQ OMX Stockholm) during the year of 2005 to 2014…........

70

Appendix 8 - Discount rates applied by the Swedish listed telecommunication

companies (NASDAQ OMX Stockholm) during the year of 2005 to 2014…........

71

Appendix 9 - Growth rates applied by the Swedish listed telecommunication

companies (NASDAQ OMX Stockholm) during the year of 2005 to 2014…........

72

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1. Introduction

“More than a century's worth of commentary and analysis on the subject has

cemented goodwill’s status as the black sheep of the balance sheet” (Carlin & Finch,

2009, p. 326) From this phrase, it could be noticed that goodwill has been criticized

recently about its reliability and true economic value, which has been presented on

statement of financial position of the company. Especially, since the implementations

of IFRS 3 - Business Combinations and IAS 36 - Impairment of Assets in 2005, the

annual amortization of goodwill has been replaced by the favor of annual goodwill

impairment testing. They require the subjective judgments of the management on the

estimations and assumptions concerning goodwill and its related impairments

(AbuGhazaleh et al., 2011; EY, 2010; IASB, 2014a; Li & Sloan, 2012; PwC, 2009).

The annual goodwill impairment testing required by IAS 36 has increased the

likelihood of subjective valuation of goodwill and its related impairment. When

goodwill should be valued at its fair value annually, several prior studies have shown

that this fair value measurement of goodwill was an opportunity for the management

of the company to do in an opportunistic way. Specifically, prior studies of Beatty and

Weber (2006) and Watts (2003) have revealed that the valuation to fair value of

goodwill was a base of earnings management, where the management subjectively

decided the value of goodwill and the impairments to be realized. However, these

prior studies is in contrast with the intention of IASB when issuing IAS 36, because

this accounting standard was implemented in order to enhance the presentation of a

fair value of goodwill, and the goodwill impairment should be decided by different

indicators.

According to IAS 36, the economic impairment indicators could be generally

classified into both external and internal sources. The external and internal economic

indicators have been examined in several prior studies, which have revealed that they

should have significant influences on goodwill impairment decisions. It is important

that these economic impairment indicators should be taken into consideration by the

management of the company (ESMA, 2013). Even though the external and internal

economic indicators should have significant influences over goodwill impairment

decisions of the management, this is not always the case since the subjective

2

judgments of management could still be identified, which in turn leads to the issue of

earnings management within the company.

1.1 Problem Discussion

The impairment indicators, as mentioned earlier, should be considered as an important

key of valuations and decisions of goodwill and its related impairment. As in the

earlier studies, both external and internal economic indicators of goodwill

impairments were significant in determining the value to be realized (Beatty &

Weber, 2006; Chye Loh & Tan, 2012; Hayn & Hughes, 2006; Peetathawatchai &

Acaranupong, 2012). However, the accounting standards concerning goodwill and

goodwill impairments are still examined to be subjective ones, and the stated

impairment indications are not exhaustive, therefore, the decisions concerning

assumptions and valuations of goodwill and its related impairments are solely left to

the management team of the company. Consequently, the value of goodwill

impairment is criticized about its reliability, and its associations with the external and

internal economic indicators were recently questioned and argued in several prior

studies (AbuGhazaleh et al., 2011; Beatty & Weber, 2006; Chye Loh & Tan, 2012;

ESMA, 2013; EY, 2010; IASB, 2014a; Hayn & Hughes, 2006; Li & Sloan, 2012;

Peetathawatchai & Acaranupong, 2012; PwC, 2009).

During the economic crisis, as the one in 2008, the goodwill impairment indicators

would indicate a need of increased impairments of goodwill. Still, this has not been

the case for companies in Sweden. According to Gauffin and Thörnsten (2010a),

during the financial crisis in 2008, Swedish companies only impaired 1.5% of the

total goodwill. In comparison with companies in the US, which impaired 30% of their

total goodwill, this is considered to be a small amount. It is not only in the US that the

impairment of goodwill is more associated with the trend of the economy, but also in

some other countries. For instance, in Australia, the financial crisis in 2008 has

influenced the increase of disclosure requirements concerning goodwill impairment

testing, which indicated that the impairments have increased during that circumstance

(Bepari et al., 2014). According to these facts, it is suspected that the impairments of

goodwill in other countries are also associated with the trend of the economy better

than the Swedish listed companies. Also, this indicates that the valuation of goodwill

3

in Swedish listed companies can be criticized and questioned, and it is also a

confirmation of the study of Grefberg (2009), which stated that the valuation of

goodwill of companies in Sweden were not associated with the trend of the economy.

Besides from the indicators of overall economy, the performances of the company,

which are considered to be the internal ones, would also affect the decisions and

values of goodwill impairments. According to the Beatty and Weber (2006) and

ESMA (2013), the company with existing and potential poor performance is expected

to have higher value of goodwill impairments than those in the better situations. From

this point of view, during the financial crisis, most of the company is also predicted to

perform worse, particularly with lower operating cash flow (ESMA, 2013), which

could lead to the need of higher impairments. Especially, the Swedish listed

companies discussed earlier in the prior studies of Gauffin and Thörnsten (2010a) and

Grefberg (2009) were evidenced of recording too low impairments.

Subsequently, the associations between goodwill impairments and the external and

internal economic indicators could be obviously questioned for the Swedish listed

companies. And this is, of course, a problem when estimating the values of the

companies in Sweden. Besides, it becomes even extra problematic with the industries

that the companies have the high values of goodwill in their statements of financial

position, for instance, the telecommunication industry (EY, 2010; PwC, 2009).

Specifically, the goodwill positions to the shareholders’ equity of almost 65% within

the telecommunication industry have demonstrated the high importance of goodwill,

which tended to increase the risk concerning the related impairment, and also these

impairments will then directly affect the net income of the company (Peetathawatchai

& Acaranupong, 2012; PwC, 2009). More importantly, during the triggering event of

the economic crisis, the telecommunication industry was evidenced to be responsible

for some of the largest goodwill impairments, and its impact on the earnings of the

companies within this industry was identified to be much more significant than those

of other intangible assets (PwC, 2009). From these reasons, this study will be relied

on the structures of the above prior studies, departing from those studies and the

peculiarities mentioned earlier with a point of view to come up with a more specific

high risk of goodwill impairment industry in Sweden, in order to further investigate

the associations of the values of goodwill impairments with the external and internal

economic indicators.

4

1.2 Research Purpose

The purpose of this study is to examine how are the associations between goodwill

impairments recorded by listed telecommunication companies in Sweden (NASDAQ

OMX Stockholm) and the external and internal economic indicators.

1.3 Research Question

How are goodwill impairments recorded by listed telecommunication companies in

Sweden (NASDAQ OMX Stockholm) associated with the external and internal

economic indicators?

1.4 Structure of the Study

The remaining chapters of this study are organized as follows:

Chapter 2 Background - This chapter presents the descriptions of goodwill and

impairment testing regulations, which include IFRS 3 - Business Combinations and

IAS 36 - Impairment of Assets. Also, the indications of impairments are presented,

together with the determinants of recoverable amount.

Chapter 3 Theoretical Framework and Prior Studies - This chapter presents the

economic indicators of goodwill impairments from prior studies. Also, the foundation

theories, which are agency theory, and earning management, are also used to explain

the ideas and results of the study.

Chapter 4 Research Methodology - This chapter presents the research design and

methodology used for the study. It also contains the selections and descriptions of the

sample, data collection, data analysis procedures, as well as, the discussion

concerning the reliability and validity of the study and the results.

Chapter 5 Empirical Results - This chapter presents the results of the study derived

from the collections of data, which are related to goodwill, goodwill impairments,

external and internal economic indicators, as well as the discount rates and growth

rates that are applied by the companies. Also, the data collected are presented using

tables and figures in order to clearly illustrate the overall amounts and trends.

5

Chapter 6 Discussions - This chapter presents the discussions concerning the possible

associations between goodwill impairments and the external and internal economic

indicators that could be found from the results of the study. Also, the reasons and

explanations behind these associations are illustrated and extended by the ideas of

agency theory and earnings management.

Chapter 7 Conclusions and Further Research - This chapter presents the final

conclusions, which are derived from the main empirical results, and based on the

theoretical framework developed in the previous chapter. Also, the suggestions of

future research are described in the final part.

6

2. Background

In this chapter, the accounting regulations regarding goodwill and goodwill

impairments - IFRS 3 and IAS 36 are presented. Also, the external and internal

economic indicators, as well as measurements of recoverable amount are expressed.

2.1 IFRS 3 Business Combinations

IFRS 3 Business Combinations was issued in the year of 2004 by International

Accounting Standards Board (IASB), in order to introduce the new rule of business

combination, goodwill, and the related annual impairment tests (Alves, 2013). IFRS 3

was issued to replace IAS 22 Business Combinations, and this lead to the changes in

the accounting treatments of business combinations of companies over the world,

including Swedish companies (Hamberg & Beisland, 2014).

According to Hamberg and Beisland (2014), prior to the issuance of IFRS 3, the

European companies were allowed to make the alternative between the purchase and

pooling methods for business combination, but the purchase method led to the

increases of goodwill, which affected the future earning of the companies. Goodwill

was previously from the differences between the purchase price and the book value of

equity of the acquired firm. The intangible assets in the acquired firm are specified at

the acquisition date, and these intangible assets can be held indefinitely or amortized

over their useful lives or up to maximum of 20 years, depending on the nature of

intangibles.

IASB recognized that the method of goodwill amortization was not useful in

providing the relevant information to the financial statement users, therefore, the

alternative of impairment testing was introduced and considered to provide more

useful information, which enables the users to evaluate the nature and financial effects

of business combinations (IASB, 2014b). Under IFRS 3, business combination needs

to be recognized as an asset under purchase method, and the goodwill of the company

has to be tested annually to determine whether there are any changes in the value, as

well as the related annual impairments (Alves, 2013). And, the tests of goodwill

7

impairments of the company on an annual basis have to be done in accordance with

IAS 36 Impairment of Assets (Hamberg & Beisland, 2014).

2.2 IAS 36 Impairment of Assets

IAS 36 - Impairment of Assets states the procedures that the company has to apply, in

order to ensure that the assets are carried at no more than their recoverable amount. If

in the case where the carrying amount of the assets exceeds the amount to be

recovered, either from usage or sale of the assets, these assets will be considered as

impaired. And from this point of view, IAS 36 also requires that the company should

then recognize it as an impairment loss. Moreover, at the end of each reporting period,

the company should assess whether there is any indications that the assets may be

impaired, and this impairments of the assets are subjected to be tested on the annual

basis. The indications stated include the information from external and internal

sources; still the indications listed in this IAS 36 are still not exhaustive (IASB,

2014a). Therefore, the company should also consider some specific indicators, which

are applicable to the type and nature of business of the company (PwC, 2009)

2.2.1 Indications of Impairments

IAS 36 requires that if there are any indications of impairment, each separate asset is

tested for the impairment. The assets with indefinite lifetime, which are not

amortized, should be tested for impairment on an annual basis. Under the requirement

of IAS 36, the management of the company has to assess whether there are any

impairment indications exist for the assets at each reporting date. In assessing the

indications, the management of the company should, at minimum, consider the

internal and the external sources of information. However, IASB still consider that

these indications mentioned are still not exhaustive, meaning that the company may

identify other indicators of impairments as well, and these would also require the

company to determine the recoverable amount of assets or perform the impairment

tests in the case of goodwill (IASB, 2014a).

According to IAS 36, the external economic indicators include the significant

changes, which provide the negative effect on the company, that are taken place

during the period or in the near future. Significant changes are considered to be

8

associated with the issues of technology, market, economic, and legal environment.

Also, the market interest rates and other market rates of return on investment, which

tend to affect the discount rate used in calculating the value in use, and the value of

recoverable amount, should also be taken into consideration. Besides, the current

situation and the trend of market value of the assets, as well as the market

capitalization, should also be observed for any significant variations.

Referred to IAS 36, internal indicators of asset impairments concern with the issues

related to the assets themselves and the performance of the reporting companies. For

the issues related to the assets being valued for impairments, the evidence of

obsolescence, idle, and damages of the assets should be considered. Also, the

significant changes related to the operations and usages of the assets during the period

or in the near future, should be assessed. More specifically, the evidences available in

the internal reporting of the company, which indicate the economic performance of

the assets, should be observed. For instance, cash flow or the subsequent cash needs

for operating and maintaining the acquiring assets, as well as the actual and budgeted

net cash flow and the operating profits and losses associated with the assets.

Moreover, since goodwill represents the resources that cannot be reliably identified or

quantified, the goodwill cannot be tested separately (Petersen & Plenborg, 2010).

Therefore, goodwill is then allocated to each of the cash-generating units (CGU) or

groups of CGUs. A CGU is “the smallest identifiable group of assets that generates

cash inflows that are largely independent of the cash inflows from other assets or

groups of assets.” (IAS 36, p.6). So, in conducting the annual goodwill impairment

tests, if the recoverable amount of the CGU, which the goodwill is allocated, is lower

than the carrying amount, the difference is considered as an impairment loss, and if

that difference is greater than the carrying value of goodwill, the total goodwill will

be written off.

The regulation of allocating goodwill to CGUs allows the companies to make their

own judgments of how to formulate the CGUs. The identification of CGUs requires

the assumptions that often are subjective in their nature and that make the

identification of CGUs one of the most complex processes (Hayn & Hughes, 2006).

The process of identifying CGUs depends to their subjective natures, which provide

9

the opportunities for managers, in some cases, to avoid impairing goodwill, even

though, it would be necessary if the goodwill was valued on its own (AbuGhazaleh et

al., 2011). If managers, for example, choose to allocate goodwill to a CGU that is

expected to increase in value, the goodwill might be overvalued because of its

allocation to the CGU (AbuGhazaleh et al., 2011). Moreover, according to Alves

(2013), the estimations of CGU are not based on the active market prices, so they are

not verifiable and thus, open to the manipulations. Also, it is argued that the allocation

of goodwill among the CGUs is subjective one, because goodwill represents the

benefits accrued to all units and a company as a whole.

According to IAS 36, there are various elements in the determining the value of assets

in use: the estimation of expected future cash flow that the company expect to derive

from the assets, the expectation of possible variation in the amount and timing of that

future cash flow, the time value of money, which include current market risk-free rate

and appropriate discount factors, and other factors, for example, liquidity.

2.2.2 Measurement of Recoverable Amount

“The recoverable amount of an asset or a cash-generating unit is the higher of its fair

value less costs to sell and its value in use.” (IAS 36, p.6). If one of the fair value less

costs, or the value in use exceeds the book value of goodwill, the other value does not

need to be calculated, because there will be no need for impairments (Marton et al.,

2008). Fair value less costs is almost never used because goodwill is not traded in the

market. Therefore, it becomes almost impossible to calculate fair value less costs to

sell, which leads to that value in use, and it is the method used when valuing goodwill

(Marton et al., 2008).

Value in use is the net present value of expected future cash flows to the CGU. When

calculating the value in use, forecasts of the growth rate of future cash flows need to

be estimated, as well as an appropriate discount rate (Marton et al., 2008). In IAS 36

p.134, there are requirements stating that the growth rate should be estimated for the

period after the forecast period. The growth rate of the future cash flows from the

goodwill is something that has to be estimated appropriately. In some DCF-models,

the terminal growth rate can represent as much as 50% of the total value, which

10

makes it as an important factor (Larrabee & Voss, 2012). If the company uses a

growth rate that is too high according to its country, industry and etc., the company

should explain the reasons for its estimations. Moreover, the estimations of growth

rate have been under criticisms. Especially as in the report of ESMA (2013), it was

criticized about the disclosures of growth rates in company’s annual reports, and also

the growth rates in many cases are overestimated which lead to overestimated values

of the expected future cash flows.

When valuing the goodwill, one important factor is the discount rate. Companies are

expected to provide information about the assumptions for the discount rate, and the

discount rate should be before tax. The discount rate should reflect the required return

of capital from the stakeholders, and small changes in the discount rate can lead to big

changes in the valuation of goodwill. In IAS 36, there are guidelines of how to

estimate an appropriate discount rate. If it is applicable, the discount rate should be

derived from market transactions of similar assets. If that is not applicable, models

like CAPM and Fama and French three factors model can be used (Kvaal, 2010).

Carlin and Finch have conducted several studies about discount rates in goodwill

valuation. In these studies, listed companies in Australia, which applied IFRS were

focused. In 2008, Carlin and Finch conducted the study, which resulted that the

companies only applied one discount rate that was compounded for the whole

company, although the goodwill was spread out on different units (Carlin & Finch,

2008). This was an indication that the companies did not comply with the standard of

IAS 36. Because, IAS 36 states that the discount rate should be compounded

separately for every unit. Moreover, according to Carlin and Finch (2008), the

companies that only applied one discount rate had a tendency to use discount rates

that was too low according to the current market conditions. One company in the

study even applied a discount rate that was lower than the risk-free rate (Carlin &

Finch, 2008). This was remarkable because during this time, the risk-free rate was

low, but the risk premium was instead high (Gauffin & Thörnsten, 2010a). In 2009,

Carlin and Finch followed up the study from 2008 and reviewed those companies that

only applied one discount rate. In this study, Carlin and Finch have calculated

additional discount rate for every company, and compared it with the discount rate

that the company used (Carlin & Finch, 2008). And, another study, in the following

11

year, confirmed that companies that only applied one discount rate use a rate that is

too low according to the market conditions (Carlin & Finch, 2009). Additionally, in

2010, the follow-up study was conducted again, and it was found that smaller

proportion of company applied too low discount rate. After times, this indicated that

companies complied with the standard better, but there were still many companies

that applied too low discount rate (Carlin & Finch, 2010).

It was also found in the study of Gauffin and Thörnsten (2010a) that the companies

have the tendency to use discount rates that are considered to be too low. During the

crisis in 2008, only 17% of the companies increased their discount rates, although the

risk premium in the market was high. Instead, almost one-third of the companies

chose to decrease their discount rates, which were remarkable due the conditions of

the market (Gauffin & Thörnsten, 2010a).

12

3. Theoretical Framework and Prior Research

In this chapter, the theoretical framework for this study is provided, and also, the

external and internal economic indicators of goodwill impairments mentioned in

several prior studies are discussed. Moreover, the foundation theories of agency

theory and earnings management are also used to incorporate the ideas of associations

between goodwill impairments and the economic indicators.

3.1 Impairment Indicators

Since IAS 36 requires the management of the company should assess whether the

impairments indicators exist for the assets, but the indicators mentioned are still

considered to be uncompleted. Therefore, the management of the company has a

chance to subjectively identify other indicators of goodwill impairments as well (EY,

2010; PwC, 2009). And, there were several studies that concerned and argued about

the external and internal economic indicators of goodwill impairments.

3.1.1 External Economic Indicators of Impairments

According to IAS 36, the external economic indicators that influence the assets and

goodwill impairments were identified in a broad condition, for example, significant

changes that affect the company in term of market and economic environment.

Therefore, there were several studies, which specified and argued further about the

specific external economic indicators concerning the assets and goodwill

impairments.

According to the study of Chye Loh and Tan (2012), macroeconomic factors have the

influences on the decisions of the assets write-off of the 78 listed companies in

Singapore during 1983 to 1997. Under this study, the macroeconomic factors included

changes in GDP, changes in stock index, changes in interest rate, changes in

unemployment rate, and occupancy rate of properties. And, the results of the study

showed that the GDP growth rate, unemployment rate, and occupancy rate of

properties were significant factors related to the listed companies in Singapore write-

off decisions (Chye Loh & Tan, 2012). The GDP level of the country and the

indicators of equity market situations, including book-to-market value of the equity,

13

are also observed in the studies of Beatty and Weber (2006) and Peetathawatchai and

Acaranupong (2012). The studies found that these indicators were associated with the

assets and goodwill impairment decisions of the companies being observed (Beatty &

Weber, 2006; Peetathawatchai & Acaranupong, 2012).

Besides from the specific indicators concerning the externalities of the company,

including the GDP level, market interest rate, stock index, unemployment rate, and

occupancy rate of properties, the overall trend of the economy and the situation of

financial crisis were also significant in the prior studies. Gauffin and Thörnsten

conducted their study in 2010, which was related to the impairments of goodwill of

the companies in Sweden. In this study, the valuation of goodwill of Swedish listed

companies was criticized, and in 2008, the financial crisis was on its peak, which,

according to the theory, should lead to the increase of impairments of goodwill.

However, this was not the case in Sweden. The average amount of goodwill in the

listed company's’ balance sheets was as much as 30% of the equity. Only 14% of the

Swedish companies recognized the impairments of their goodwill for a value of

approximately 1.5% of the total amount of goodwill (Gauffin & Thörnsten, 2010a). In

comparison with companies in the US, this was considered to be a small amount. In

the US, 17% of the companies recognized impairments of their goodwill for a value

of about 30% of the total amount of goodwill (Gauffin & Thörnsten, 2010a). In 2009,

the Swedish companies increased their goodwill impairments to 1.9% of the total

amount of goodwill, but, according to Gauffin and Thörnsten (2010b), this was not a

significant improvement. For the year 2010, Gauffin conducted the study with Peter

Wallén, which revealed that the impairments of goodwill in average was, as low as,

under 1% of the total amount of goodwill (Gauffin & Wallén, 2011).

The fact that the impairments of the companies in Sweden have been lower than the

impairments of the companies in the US cannot be explained by the fact that the

financial crisis was more severe in the US. The differences were significant, which

indicated that the financial inspectorate in the US has demanded more disclosures

about why impairments have not been recognized (Gauffin & Thörnsten, 2010a). This

is something that Gauffin and Thörnsten (2010a) and Gauffin and Wallén (2011)

expected from the Swedish Financial Supervisory Authority as well.

14

The problem of high amount of goodwill in companies listed on NASDAQ OMX

Stockholm has been crucial in recent years. In 2012, the total amount of goodwill of

the companies increased through acquisitions by 45 billions, and in 2013, they

increased by 47 billions. In the meantime, the impairments in 2012 were 10 billions,

and in 2013 the impairments of goodwill were only 4.2 billions, which indicated that

goodwill valuation was still considered as a problem in Sweden (Gauffin & Nilsson,

2014).

3.1.2 Internal Economic Indicators of Impairments

The internal economic indicators, which are identified in IAS 36, are still considered

to be not exhaustive. Since, it still requires that the management of the company

should assess other indicators besides from what have already mentioned (EY, 2010;

PwC, 2009), thus, there were several studies that identified and argued about the more

specific ones that influence the decisions and amount of assets and goodwill

impairments.

According to the study of Beatty and Weber (2006), several potential economic

incentives that the companies faced when making this accounting choice were also

observed. These economic incentives included debt contracting, earning

compensation, and CEO tenure. More specifically, the riskier companies were

positively related to the goodwill write-offs, also the earning-base bonus plan

companies tended to reduce the possibilities of goodwill write-offs. And, the study

also revealed that the goodwill impairments, book-to-market value of the equity, and

number of segments were positively related. While, the market-to-book value of the

company's assets was negatively related to goodwill impairments (Beatty & Weber,

2006). In addition, the company's chairman and managing director alteration

mentioned in the study of Chye Loh and Tan (2012) were also subjected to influence

the asset write-off decisions of the 78 listed companies in Singapore during the year

of 1983 to 1997.

Additionally, the study of Hayn and Hughes (2006) also investigated the associations

between the impairment losses and the company's acquisition characteristics. Also,

the associations between goodwill impairment losses and the operating performance

15

of segment, which included ROA, change in ROA, change in sales, operating losses,

change in competitive advantages, and cumulative abnormal return, were also

incorporated. The study also revealed that ROA and change in ROA were considered

to be crucial related to goodwill impairments (Hayn & Hughes, 2006). Moreover,

ROA together with other company’s specific performance indicators, which were

sales, earnings, cash flow, and book-to-market value of equity, were observed in the

study of Peetathawatchai and Acaranupong (2012). The study revealed that the

impairment losses of 1,418 Thai listed companies during the year of 1999 to 2004 are

associated with the impairment indicators described in Thai Accounting Standard

(TAS) no. 36, especially the operating cash flow recorded by the companies, also they

are consistent with the economic indicators (Peetathawatchai & Acaranupong, 2012).

Besides from the indicators mentioned, the assumed directions of associations were

also discussed in several studies. Most of the internal economic indicators, which

included sales, earnings, operating cash flow, and ROA, are predicted to be negatively

related to the amounts of goodwill impairments recognized by the companies (Chye

Loh & Tan, 2012; Hayn & Hughes, 2006; Peetathawatchai & Acaranupong, 2012).

3.2 Agency Theory

The works of Jensen and Meckling (1976) and Fama and Jensen (1983) were the main

focuses of the agency theory. The theory identifies the relationship between the

principal and the agent, in which the principal is superordinate over the agent. The

agent, therefore, works for the principal, which is the source of potential

disadvantages (Mallin, 2013). The agent might, for example, work in an opportunistic

way and only see to his own interest. One example of a principal-agent relationship is

the relationship between the management team and the stakeholders. The

management team is those who has more information about the company, and is

supposed to work for the shareholders best. The fact that the management team has

the more information is an opportunity for them to work for their own self-interests,

and this is considered to be a risk for the shareholders, which is something that should

be taken into consideration (Mallin, 2013).

Concerning about the goodwill valuation, the agent-principal relationship could be a

source of problems and subjective judgments of the management of the company.

16

And, this could be even worse after the implementation of the accounting standards

concerning goodwill and its related impairments, which require the management of

the company to estimate the current fair value of goodwill to determine the value of

goodwill impairment. From this point of, together with the gap of unverifiable

goodwill assumptions, the management of the company was implied to convey their

own preferable private information on goodwill, especially on the company’s future

cash flows (Ramanna & Watts, 2012).

Moreover, in valuing goodwill, the management team could also use their knowledge

about the company to value the goodwill to an amount that is preferable for them, for

instance, the purpose to declare a good result (AbuGhazaleh et al., 2011). In addition,

there were also possibilities for the management of the company to record even no

goodwill impairment on their financial statements. According to the prior study of

Ramanna and Watts (2012), the decision of non-goodwill impairment of the sample

companies was investigated to be associated with the motives predicted by the agency

theory to affect the management choice. These evidences of association were

specifically significant with the CEO compensation, CEO reputation, and debt-

covenant violation concerns (Ramanna & Watts, 2012).

Besides of all, the management of the company may also have some other private

incentives concerning the disclosures of the information concerning goodwill and

goodwill impairments. Referred to IAS 36, it contains extensive disclosure

requirements with respect to the impairment tests, for example, the carrying amount

of goodwill allocated to CGUs, the basis on which the CGU’s recoverable amount has

been determined, and especially the important descriptions when the recoverable

amount is based on a DCF-model calculation (PwC, 2009). The management’s

incentives concerning these disclosure requirements could be more obviously

evidenced in the publication of PwC (2009), where the level regarded to the required

information tended to be considerably varied in the annual reports of the

telecommunication companies. It was also found that none of the annual reports of

those companies disclosed a rate of reinvestment, and particularly during the

economic crisis, there was a significant scope for enhanced disclosures in the areas

concerning the assumptions behind goodwill impairments, which were considered to

be notable helpful for the users of the company’s financial statements (PwC, 2009).

17

And due to these subjective accounting standards, valuation of goodwill is somehow

difficult for the management team to conduct, and estimation of the fair value of

goodwill is often problematic. This leads to that the management team of the

company, in all situations, is not able to estimate the fair value, and, therefore, the

impairments of goodwill will not always be based on accurate estimates. This is a

problem for stakeholders, especially, investors and creditors, when they evaluate the

true economic value of the company (Li & Sloan, 2012). However, the agency theory

could help predicting whether the management uses the un-verifiability in accounting

judgments to opportunistically manage the financial earnings, or to make the

accounting choices of the company (Ramanna & Watts, 2012). However, it is also

believed that the current goodwill accounting rules tend to have a potential of making

the agency-based problems within the company even worse (Pajunen &

Saastamoinen, 2013).

3.3 Earning Management

Earning management is considered to be an attempt that the management of the

company to influence the short-term reporting income. In addition, during the 1990s,

the management of the companies encountered the serious pressures to obtain the

targeted earnings, also to reach the financial analyst’s earning projections for their

companies. Therefore, the management in some companies applied aggressive or

even fraudulent financial reporting practices (Sevin & Schroeder, 2005). Earning

management can be occurred for several reasons, for instance, increasing

management compensation, influencing stock market, and managing lending

agreements. Management of the companies may strive to manage the company’s

earnings because they believe that the earnings have a power in influencing the

decisions of investors and creditors. It is also believed that earnings management is

created to improve income (Healy & Wahlen, 1999). Moreover, according to

Kirschenheiter and Melumad (2002), the management tends to report higher earnings

in order to project long-term earnings. In the predicted worse situation, the

management has incentive to under report the earnings by maximum possible amount.

In this situation, the big bath is preferable in the current reporting period in order to

reduce the assumed precision of earnings number. While in the predicted better

18

situation, management prefers to smooth the earnings in order to report smaller

earnings surprises.

The opportunity of reporting flexibility under the accounting standards tend to allow

management of the companies to suggest a decrease, which is considered as big bath

charges, or an increase, which is the behavior of smoothing, in reported earnings. And

this will, in turn, distort the economic value of the company. The results of the study

of Peetathawatchai and Acaranupong (2012) also revealed that the management

recognized the impairment losses to smooth the company’s earnings when earnings

increased, which led to the conclusion of distortion of the company’s economic value.

Also according to prior studies, there was evidence that the management of the

companies may take the advantages of the accounting standards to make the decisions

concerning the impairment loss amounts. Also, the goodwill impairment testing and

write-off decisions enable and encourage the management of the companies to engage

in earning management. For instance, management tends to overstate the assets

impairments by employing big bath charges or by smoothing the reported earnings of

the companies (AbuGhazaleh et al., 2011; Francis et al., 1996; Pajunen &

Saastamoinen, 2013; Riedl, 2004).

According to the study of Beatty and Weber (2006), it examined the Statement of

Financial Accounting Standards (SFAS) 142 - Goodwill and Other Intangible Assets,

adoption decision, and the concerned write-off decisions. The outcome of the

management of the company’s goodwill allocation and reporting unit decisions were

investigated by examining the write-off determinants under SFAS 142. Besides, the

study also provided the evidence that managerial incentives do have significant effect

on the accounting choice of the companies (Beatty & Weber, 2006). Moreover, Hayn

and Hughes also conducted a study in 2006 concerning the compliance of American

companies toward accounting standard of the US GAAP. In the study, 1,276

companies that made acquisitions in 1988 during a period of eleven years with the

purpose of examining how the amount of goodwill changed over time. And, from the

findings of the study, impairments of goodwill had a tendency to be delayed from the

evidence that should have been the cause of the impairments. The impairments of

goodwill, in many cases, could be delayed between three to four years from the

causation that led to the need of the impairments. In some cases, the delay of the

19

impairments could be, as long as, up to ten years. Also, the possible explanations for

the delay of impairment were that management of the company might be cautious to

recognize the impairments before the economic outcome can be predicted. The

impairments were recognized under “waiting period” until the reduction in value was

ascertained. Another explanation is that management of the companies recognized the

impairments and pushed them under “waiting period” was because the losses were not

preferable (Hayn & Hughes, 2006).

20

4. Research Methodology

In this chapter, the research design and methodology used in this study are presented

and discussed. Also, the selection of sample companies is also motivated and

demonstrated, as well as the data collection and data analysis procedures.

Additionally, the discussion concerning the reliability and validity of this study is also

included.

4.1 Choice of Method

This study will be focused on the qualitative research approach. As mentioned in the

earlier chapter, the purpose of this study is to examine whether there is any

association between goodwill impairments recorded by the listed telecommunication

companies in Sweden (NASDAQ OMX Stockholm) and the external and internal

economic indicators, the two common research approaches are considered to be the

possible keys in fulfilling this purpose of the study. However, the qualitative research

approach was chosen because this research approach tends to look deeper into the

purposes and research questions, also it is considered to be more flexible in the

limited structure (Bryman & Bell, 2011). And, since there are several research

methods associated with qualitative approach, the collection and qualitative analysis

of texts and documents was concentrated in this study. The annual reports, as the

sources of secondary data, of the sample companies will be reviewed for the amounts

of recorded goodwill impairments and the internal economic indicators, which are

concerned with the companies’ performances, as well as the external economic

indicators that can be derived from the reliable online sources. As intended, the

analysis and the interpretation of the association between goodwill impairments

recorded by the listed telecommunication companies in Sweden (NASDAQ OMX

Stockholm) and the external and internal economic indicators will be also conducted

qualitatively. Moreover, it is also believed that the results of the study will be more

productive under the adoption of the qualitative research methods.

In addition, the inductive research reasoning is also applied in this study. The

inductive reasoning is related to the qualitative research approach. It involves the

induction as the researcher infers the implications of the findings for the theory,

21

which means that the findings are fed back to the stock of theory (Bryman & Bell,

2011). For this study, the observations and findings of the existing secondary data will

be first taken into actions. Also, the empirical findings will also base on the

theoretical framework constructed. Afterward, the empirical findings will be observed

again whether they are in line with the existing theories, if not, the study will develop

a new aspect of the existing theory. Finally, this study is also conducted in accordance

with the descriptive research. According to Krishnaswamy and Satyaprasad (2010),

descriptive research concerns with the analysis of the facts and investigations of

existing situation. It mainly focuses on different dimensions of the problem under the

study (Krishnaswamy & Satyaprasad, 2010). Likewise, this study is decided to

examine the interrelationship between the goodwill impairments recorded by the

selected companies and the external and internal economic indicators, which is based

on existing facts and situations.

4.2 Sample Selection

The study covers the listed companies in telecommunication industry on NASDAQ

OMX Stockholm. In this telecommunication industry, there are six listed companies.

Nevertheless, our sample will consist of merely five of those listed companies, which

are AllTele AB, DGC One AB, Millicom International Cellular SA, Tele2 AB, and

TeliaSonera AB. Since one of the companies, named Com Hem Holding AB, was just

listed on NASDAQ OMX Stockholm started from the year of 2004. Including Com

Hem Holding AB in the group of sample companies is considered to be controversial,

because the study and the results of the study will be in the questions of

comparability, reliability, and accuracy.

Besides, the main reason to include the telecommunication industry in this study is

because companies in this industry tend to have high value of recorded goodwill in

their financial statements, which was surveyed and evidenced by EY (2010) and PwC

(2009). Also, it was also argued that the companies with high amount of recorded

goodwill could possibly lead to an increased risk of impairments (PwC, 2009).

Additionally, there are several telecommunication companies in Sweden, yet this

study concerns only with the companies listed with NASDAQ OMX Stockholm. This

is because NASDAQ OMX is one of the largest and most efficient equity markets in

22

Europe. The investors and user of financial statements both globally and locally can

have maximum accesses and visibilities. The companies listed with NASDAQ OMX,

as well as NASDAQ OMX Stockholm adhere to the high standards of reporting,

which provide the transparency and accountability to investors and other users of

financial statements (NASDAQ OMX, 2015).

4.3 Data Collection

The purpose of this study is to examine whether there is any association between

impairments of goodwill recorded by listed telecommunication companies in Sweden

and the external and internal economic indicators during the year of 2005 to 2014.

Therefore, the information from available online sources, for example, Swedish

National Institute of Economic Research, IASB, and FASB, the sample companies’

annual reports, articles, and books were examined, manually collected, and used. The

study, which employed the information available from different sources, such as from

the websites, publications, and annual reports, is considered to be a secondary data

study (Dahmström, 2005). It is also believed that these materials could enhance the

research quality and precision.

The annual reports, which are covered from the year of 2005 to 2014, are available in

the companies’ websites, and they can be publicly accessed and downloaded. The

English version of the annual reports of five selected companies are the main

intentions of this study, but the annual reports available on websites of AllTele AB

and DGC One AB are only published in Swedish. Thus, both English and Swedish

versions of annual reports are used. Also, the financial statements of Millicom

International Cellular SA were presented in term of US Dollar amount; therefore the

conversion of US Dollar to Swedish Krona (SEK) was done based on the closing date

rate for each fiscal year. However, the annual reports during the year of 2005 and

2006 of Millicom International Cellular SA were not publicly available on their

company’s website, regardless, the corporation of the company was granted, and

these annual reports were finally reachable. In addition, the fiscal year used to present

the financial information in the annual reports during 2005 and 2006 of DGC One AB

were not common as other companies as from January to December of each year.

Instead, the period of January 2005 to April 2006 was used, yet this fiscal year has

23

changed during 2006, and 2007 afterwards was ordinarily presented. Anyway, this

matter is not concerned as controversial for this study.

Further, the articles and publications of the big four auditing companies have been

used in order to capture their views of the problems relating to goodwill impairments.

The accounting standards concerning goodwill and related impairments, including

IFRS 3 and IAS 36, have been collected from IASB and IFRS websites. Also, the

scientific articles have been used in order to examine what previous researches in the

related area have concluded. Moreover, some of scientific articles referred to other

goodwill and impairment standards than IAS 36, such as SFAS 142 and TAS no.36,

but since these standards are similar to each other, and concerned the same problems,

thus, those articles can still be useful in the theoretical framework of this study,

despite the fact that they are concerned with other standards than IAS 36.

4.3.1 Goodwill and Goodwill Impairments

As the aim of this study is to examine whether there is any associations between

goodwill impairments and the economic indicators, thus, the goodwill impairments

recorded and presented in the financial statements of the sample companies were the

main focuses. However, the direct amounts of goodwill impairments that are collected

from the annual reports of each company would not represent the level of recognition

of impairment. For instance, low amount of goodwill impairments of one company

can be high in another company; therefore the goodwill impairments rates were

manually calculated through the facilities of Microsoft Excel program. The goodwill

impairment rate is determined by the proportion of annual goodwill impairment over

the amount of recorded goodwill in each year. Moreover, the information and amount

of goodwill and goodwill impairments are disclosed and presented differently for each

sample company.

The amounts of goodwill are collected manually from each year annual report of each

company. Goodwill is the amount, which is recognized by the companies in the

consolidated statements of financial position at the end of each year. In this study, the

amounts of goodwill were observed both from the company's consolidated statements

of financial position and the notes to consolidated financial statements, which are

24

commonly under the intangible assets issue. Furthermore, the annual impairments of

goodwill recognized were presented and disclosed differently among the companies,

thus, it is complicated to collect and examine. However, the different notes to the

consolidated financial statements of each company, including notes concerning the

intangible assets issues and depreciation, amortization, and impairment issues were

examined for the accurate amounts.

Besides, the collection and examination of amounts of goodwill and goodwill

impairments are conducted under some difficulties, since each company presented

these amounts differently depending on how convenient the companies realized. Also,

in some cases, for instance, AllTele AB and DGC One AB did not record their

goodwill and related impairments on their financial statements until the year of 2009

and 2011 respectively. No evidence of goodwill and related impairments was a kind

of surprises, but fortunately, the explanations of reasons for not recorded were stated

in the notes to consolidated financial statements. No goodwill and impairments of

goodwill were recorded in AllTele AB and DCG One AB during some years during

2005 to 2014 is not considered to be problematic for this study. Consequently, the

notes to consolidated financial statements concerning goodwill and goodwill

impairments were carefully observed. And, it was found that the degree of goodwill

and impairments of goodwill disclosure were varied among companies, including the

detailed descriptions and associated assumptions, which makes this difficult to state

some reasons.

4.3.2 External Economic Indicators

In this study, the external economic indicators were used when explaining the

goodwill impairment decisions. In prior studies, different external economic

indicators have found to have influences on impairments of goodwill. Four of the

most common indicators for goodwill impairments examined in these articles are

unemployment rate, inflation, GDP, and market interest rate. These indicators are

considered as the most common macroeconomic measurements (Mankiw, 2013), and

should, therefore, help us capturing the overall trends of the economy in Sweden for

the time period of 2005 to 2014.

25

The macroeconomic numbers used in this study are collected from the Swedish

National Institute of Economic Research. On this website, there are key figures over

the development of the Swedish economy, and from that, the unemployment rate, the

inflation rate, the market interest rate, and the GDP of each year during the time

period of 2005 to 2014 were manually collected.

4.3.3 Internal Economic Indicators

Besides from the external economic indicators, the internal economic indicators are

also the main focuses of this study. According to IAS 36, internal reporting that

indicate the economic performance of the assets and the company as a whole should

be examined as the indications of the impairments of the assets, as well as goodwill.

However, the internal economic indicators stated in IAS 36 are still considered to be

not exhaustive, and it is required for the reporting company to identify other

indicators as well. Therefore, there were several studies that examined the possible

internal economic indicators that were associated with and influenced the

impairments of assets, including goodwill. And, since performances of the company

was evidenced to be the influences of the amount of impairments realized by

reporting company, for instance, the companies in the declining situation tend to

record higher impairment losses than those in the expanding situation (Beatty &

Weber, 2006), therefore, there are four main internal economic indicators, which are

comprised of sales, earnings, operating cash flow, and ROA, that are included in this

study, because these four indicators are examined to be most appropriate and

appealing in representing and indicating the performances of the companies selected.

The amount of these selected four main internal economic indicators are collected

from each annual report of each company, mainly from consolidated statements of

financial position, consolidated statements of comprehensive income, consolidated

statements of cash flows, and some of the notes to consolidated financial statements.

Collecting these indicators was done manually for each year through the facilities of

Microsoft Excel program. The manual collection of data may result in the accuracy,

thus data collected was double-checked. And, the double-check processes were

conducted for every indicator collected of each company for all ten years period.

26

Moreover, each of the four internal economic indicators was derived and collected

with different techniques and difficulties.

First of all, sales amount of the each sample company were presented differently in

the consolidated statements of comprehensive income, including revenue and net

sales. Therefore, these two terms were used to capture the amount of sales of each

company as one of the internal economic indicators. For the second internal indicator,

the amount of each year operating cash flow was examined in the consolidated

statements of cash flow of each company. The amounts of operating cash flow were

recorded identically among companies as cash flow from operating activities.

Besides, the third internal indicator is labeled as earnings. In this study, the earnings

referred to the net income or the net profit presented in the consolidated statements of

comprehensive income. Whereas, the amount of the earnings used in this study are

not concerned with the amount of goodwill impairment losses recognized as

expenses, therefore, the amounts of goodwill impairments are added back to the

amount of earnings recorded by the companies, as pre-goodwill impairment earnings.

Finally, ROA is not derived from each of annual report of the companies; instead, it is

calculated manually through the facilities of Microsoft Excel program by using the

amount of pre-impairment earning divided by the amount of total assets presented in

the consolidated statements of financial position. In addition, the amount of earnings

and ROA are examined as the pre-goodwill impairment conditions, and it is because

recognition of the true performance of the companies will be easier, and the accurate

observation of association between goodwill impairments and the internal economic

indicators can be assumed effectively.

4.3.4 Discount Rates and Growth Rates

The disclosures of discount rates and the growth rates by the companies are of

varying quality. Regarding the discount rate, each company calculated differently.

Some of the companies apply pre-tax discount rates, and some apply after-tax

discount rates. According to IAS 36, the discount rate should be presented before tax.

Therefore, all discount rates applied by Millicom International Cellular SA and

TeliaSonera AB were recalculated, also the discount rates in 2010 and 2011 that were

applied by AllTele AB. Therefore, all discount rates in this study are presented on

pre-tax basis. Additionally, the first intention was to use the effective tax rates of each

27

year that were calculated by the companies to adjust the pre-tax discount rates, yet

they could not be found in the annual reports of Millicom International Cellular SA,

TeliaSonera AB, and AllTele AB. Thus, the corporate tax rates applied by the

Swedish companies of each year were used to adjust those after-tax discount rates to

be the pre-tax ones. Besides, AllTele AB and DGC One AB were the only ones that

disclosed the pre-tax discount rates for their goodwill, and this makes them easy to

interpret. Moreover, Tele2 AB and TeliaSonera AB have many different discount

rates for their different CGUs. Therefore, this was solved by calculating the average

discount rates for each year for Tele2 AB and TeliaSonera AB. Regarding Millicom

International Cellular AB, the highest and the lowest values of the discount rates of

each year were only presented. Thus, the median discount rate of each year was

calculated, except for discount rate applied in 2014 by Millicom International Cellular

SA since it was disclosed with the actual rate.

The growth rates for AllTele AB, DGC One AB, and Millicom International Cellular

SA were uncomplicated to examine, since the same growth rates were used for the

whole goodwill values. Nevertheless, Tele2 AB, TeliaSonera AB, and also the two

later years of 2013 and 2014 for Millicom International Cellular SA applied the

different growth rates for different CGUs. This was solved in the same way as the

discount rates by calculating the average growth rates of each year for each company.

4.4 Data Analysis

After all prior methods have been conducted and in order to analyze the data

collected, together with answering the research question that has been previously

proposed, the amounts and trends of the external and internal economic indicators,

discount rates, growth rates, as well as the goodwill impairments were illustrated via

wordings, tables, and figures. Moreover, the external and internal economic indicators

were examined toward each of the discount rates, growth rates, and goodwill

impairments to ascertain the predicted associations.

More specifically, the analysis processes of associations between external economic

indicators and discount rates, growth rates, as well as goodwill impairments were

distinct from those of internal economic indicators. For the external economic

28

indicators, they were analyzed with other variables on each-year basis. Since the

external economic indicators, which included GDP, market interest rates,

unemployment rates, and inflations rates, were considered to be interrelated with each

other, meaning that the trends of each indicator will definitely move into the predicted

directions, for instance, when GDP was increased, the market interest rate in the same

period will be also increased. Analyzing each of the external economic indicators

separately toward other variables will lead to redundancies. Furthermore, since the

external economic indicators were the measurements of the overall Swedish economy,

analyzing on each-year basis will lead to more precise associations, which were

relying on the existing situations.

Apart from external economic indicators, the analysis processes of associations

between internal economic indicators and other variables were conducted on each-

indicator basis, because the internal economic indicators were varied during this ten-

year period and unable to specify the explicit trends. Also, the internal economic

indicators were examined not to be fully interrelated with each other; even they were

supposed to be theoretically. Analyzing each internal economic indicator separately

will lead to more definite associations and conclusions. Finally, after the associations

between the external and internal economic indicators and goodwill impairments

could be identified and concluded, the reasons and explanations behind these issues

will be illustrated by the ideas of agency theory and earnings management.

4.5 Research Quality

Reliability concerns the question whether the survey can be reproduced and give the

same results in the later measurement occasions or similar circumstances (Bryman &

Bell, 2011). The companies, which are investigated in this survey, are all listed on

NASDAQ OMX Stockholm and have their annual reports reviewed by the auditors.

Therefore, the assumption about the reliability of data and information from

companies’ annual reports was made. However, since the data for this study was

collected manually, meaning that the random mistakes can occur, therefore, the

double-check process was done occasionally to avoid those mistakes. Moreover, the

data collection process of this study was done by two researchers separately and

crosschecked, thus the higher reliability of this study can be assumed. Nonetheless,

29

some of the sample companies’ disclosures regarding goodwill and impairments were

limited. Also, the assumptions about discount rates and growth rates were not

presented in a completed way. For instance, Tele2 AB used approximated discount

rates, which makes the analysis of goodwill valuation a lot harder. Consequently, this

facts can be questioned about the reliability of goodwill valuation of the companies,

and make it harder to draw conclusions from the findings of this study.

Validity concerns about how the empirical tools measure what they are intended to

measure. And, it also means that the study is able to scientifically answer the research

questions (Bryman & Bell, 2011). Since the research method was chosen properly for

this study, and the conclusions and results of this study were derived and developed

from the secondary data collected without any contradictions, therefore, this study can

be ensured for the acceptable level of validity. And, according to Jacobsen (2002), it

is important that the companies apply the same and consistent accounting standards

for every year. In this study, all the sample companies applied the same accounting

standards of IFRS. However, there was one company, named DGC One AB, that had

different fiscal year during the year of 2005 and 2006, but they have changed to a

normal fiscal year in 2007 and afterwards, and since DGC One AB did not recognize

any goodwill during those years, therefore, it is not concerned to be problematic for

this study. However, in this study, the sample of five listed telecommunication

companies was used. This can be considered as a small sample, and it was also

concentrated on only one single industry. This makes it difficult to generalize the

findings of this study to other industries other than the telecommunication. That is a

weakness about the validity that was aware when conducting this study.

30

5. Empirical Results

In this empirical results chapter, goodwill and goodwill impairments of each of the

five companies, and also the total one for whole industry will be presented.

Thereafter, the figures of the external and internal economic indicators, which

illustrated the trends over 2005 to 2014, will be followed. And in the last part of this

chapter, the discount rates and the growth rates applied during these years both for

each of the companies separately and the average numbers for the industry will be

also concerned.

5.1 Goodwill and Goodwill Impairments

5.1.1 AllTele AB

Year Goodwill (MSEK) Goodwill Impairments (MSEK)

2005 - 2008 - -

2009 8.73 -

2010 38.13 -

2011 80.93 -

2012 76.24 4.69

2013 125.66 -

2014 125.66 -

Table 1 Goodwill and goodwill impairments recognized by AllTele AB during the

year of 2005 to 2014

According to Table 1, AllTele AB has not been recorded the amount of goodwill and

goodwill impairments in their financial statements until the year of 2009. In 2009,

AllTele AB acquired Kramfors AB resulting in recognition of goodwill, which was

valued to 8.73 million SEK. In 2010, AllTele AB acquired Spinbox AB, LandNCall

AB, and Invegio AB, also in 2011, the company acquired AllTele Företag AB leading

to a total goodwill value of 80.93 million SEK in the annual report of 2011. In 2012,

AllTele AB realized their first impairment of goodwill. The reason for the impairment

of 4.69 million SEK was that LandNCall AB had a low profitability and Alltele did

31

not see them as part of their business plan anymore. New acquisitions were made in

2013, which increased the goodwill value to 125.66 million SEK. This value was

unchanged in the annual report of 2014 indicating that no acquisition or impairment

was done during the year.

5.1.2 DGC One AB

Year Goodwill (MSEK) Goodwill Impairments (MSEK)

2005 - 2010 - -

2011 23.00 -

2012 23.00 -

2013 23.00 -

2014 23.00 -

Table 2 Goodwill and goodwill impairments recognized by DGC One AB during the

year of 2005 to 2014

From the Table 2, the amounts of goodwill and impairments of goodwill were not

recorded during the earlier years of 2005 to 2010. Yet, until the year of 2011, DGC

One AB started to recognize the goodwill. In 2011, DGC One AB acquired BraData.

The acquisition resulted in goodwill, which was valued to 23 million SEK in the

annual report for 2011. During the years after the acquisition of BraData, DGC One

AB had not found any reasons for impairments of the goodwill, and neither had they

acquired more goodwill leading to an unchanged value of goodwill between 2011 and

2014.

32

5.1.3 Millicom International Cellular SA

Year Goodwill

(MSEK)

Goodwill Impairments

(MSEK)

2005 547.91 14.60

2006 1,445.83 -

2007 1,242.87 -

2008 3,343.07 19.06

2009 4,192.09 -

2010 10,294.62 -

2011 9,196.58 -

2012 10,224.24 -

2013 9,257.22 0.23

2014 21,032.76 -

Table 3 Goodwill and goodwill impairments recognized by Millicom International

Cellular SA during the year of 2005 to 2014

According to Table 3, Millicom International Cellular SA has been recognized the

goodwill and goodwill impairments annually during the year of 2005 to 2014.

Goodwill recognized in the financial statements of Millicom International Cellular SA

was mostly arisen from the acquisitions of subsidiaries, joint ventures, and non-

controlling interests. In the earlier years of 2005 to 2009, Millicom International

Cellular SA had relatively low amount of realized goodwill compared to others later

years, which was because of the minor acquisitions and mergers. The amount of

goodwill increased explicitly in the year of 2010 reaching the value of 10,224.24

million SEK due to the acquisition of Navega S.A. DE CV, which resulted in the right

to control and fully consolidated. And during the year of 2010 to 2013, the amount of

goodwill remained at mostly stable level. Besides, the highest amount of goodwill of

21,032.76 million SEK was realized in the year of 2014, which was mainly as a result

of merger of Colombia Movil and UNE.

33

Nevertheless, Millicom International Cellular SA has been rarely recorded the amount

of goodwill impairments in their financial statements. The goodwill impairments were

realized only in 2005, 2008, and slightly in 2013. The top amount of 19.06 million

SEK of goodwill impairment was recognized in the year of 2008. This amount of

goodwill impairment was from the company’s operation in Sierra Leone, and also the

effects of significant changes in the assumptions used to compute recoverable

amounts of CGUs, especially the discount rates applied. Moreover, the amount of

goodwill impairment realized in 2005 was slightly lower than that amount in 2008,

which was from company’s operations in Pakcom in Pakistan. Also, the reasons of

goodwill impairment during 2013 were also common to those in the two earlier years

of 2005 and 2008. Besides, during the years of no goodwill impairments recorded, it

was found that the estimated recoverable amount exceeded the carrying values. The

degrees of excesses depended on the proposed assumptions.

5.1.4 Tele2 AB

Year Goodwill

(MSEK)

Goodwill Impairments

(MSEK)

2005 26,702.00 278.00

2006 18,491.00 3,300.00

2007 12,603.00 1,315.00

2008 11,473.00 986.00

2009 10,179.00 5.00

2010 10,010.00 -

2011 10,510.00 -

2012 10,174.00 88.00

2013 9,537.00 -

2014 9,503.00 -

Table 4 Goodwill and goodwill impairments recognized by Tele2 AB during the year

of 2005 to 2014

34

From Table 4, it could be seen that Tele2 AB has recognized the goodwill regularly

throughout this ten-year period. The prominent amount of goodwill was recorded in

the year of 2005 with the value of 26,702 million SEK. These amounts of goodwill

were mainly from the acquisitions of Versatel and Comunitel. In 2006, the amount of

goodwill has decreased to 18,491 million SEK, which was still considered to be high

comparing to those recorded in the other later years. The amount of goodwill in 2006

was mainly from the acquisition of four GSM operators in Russia, Tele2 Syd AB, and

Spring Mobil. During the year of 2007 to 2014, the amounts of goodwill recognized

were not much fluctuated. These amounts were remained at approximately 10,000

million SEK.

Moreover, Tele2 AB has also recognized the goodwill impairments in their financial

statements. The majority of recognitions were during the earlier years of 2005 to

2009. For the highest amount of 3,300 million SEK, it was recorded in 2006 due to,

mainly, the expectations of the business models, which resulted in the alteration of

allocation assumption of goodwill to CGUs, and the changes in the important

assumptions. Additionally, the impairments of goodwill in the others years were

mainly arisen from the common reasons of goodwill assumptions.

35

5.1.5 TeliaSonera AB

Year Goodwill

(MSEK)

Goodwill Impairments

(MSEK)

2005 62,498.00 -

2006 62,638.00 5.00

2007 71,172.00 10.00

2008 84,431.00 -

2009 85,737.00 4.00

2010 77,207.00 174.00

2011 76,850.00 -

2012 69,162.00 7,552.00

2013 67,313.00 1,171.00

2014 70,895.00 753.00

Table 5 Goodwill and goodwill impairments recognized by TeliaSonera AB during

the year of 2005 to 2014

Table 5 shows the amount of goodwill and goodwill impairments recognized by

TeliaSonera AB during ten-year period. The amounts of goodwill were recorded

annually at relatively stable level of approximately 70,000 million SEK. The top

amount was kept at the level of 85,737 million SEK in the year of 2009. The amount

of this high goodwill was mainly from the minor business combination and

finalization of price allocation for TeliaSonera Asia Holding B.V. While, the lowest

amount of goodwill was in the year of 2005 at the level of 62,498 million SEK. In

addition, the slightly increased and decreased in the amounts of goodwill were also

from the results of the exchange rate differences.

Furthermore, the amounts of goodwill impairments were recognized differently in

each year depending on the assumptions proposed. The amounts of goodwill

impairments were recorded explicitly during the later year of 2012 to 2014, with the

highest amount of 7,552 million SEK in 2012. Besides, the continuing decreases of

total values of service operations, the competitions, and price pressure in Norway,

36

Denmark, and Lithuania were the main reasons for the goodwill impairments

recorded. Moreover, during the year with no goodwill impairments recognized was

because CGUs were not found to fall short of their carrying values.

5.1.6 Overall Goodwill and Goodwill Impairments

Figure 1 Goodwill and goodwill impairments recognized by the Swedish listed

telecommunication companies (NASDAQ OMX Stockholm) during the year of 2005

to 2014

From Figure 1, there was a decreased trend in the total amount of goodwill for the

group of listed telecommunication companies between 2005 and 2006. In the

following years of 2007 and 2008, the total amount of goodwill increased about 20%

due to the acquisitions. Thereafter, in the period between 2009 and 2011, there was

almost no impairment of goodwill leaving the total amount of goodwill at the level of

approximately 100,000 million SEK. In 2012, there were high levels of impairments

of goodwill with an amount of 7,645 million SEK. These impairments of goodwill

decreased the value of total amounts of goodwill recognized by the listed

telecommunication companies with almost 8%. In 2013, the total amount of goodwill

continued to decrease, primarily because of no acquisitions of new goodwill, since

impairments of goodwill were low. In 2014, the total amount of goodwill increased

approximately 19% while impairments of goodwill continued to be at low level.

37

5.2 External Economic Indicators

Figure 2 External economic indicators during the year of 2005 to 2014 in Sweden

Figure 2 shows the development of the four external indicators during the years of

2005 to 2014. The market interest rate, inflation rate, and unemployment rate were

presented in percentage points, while GDP was described in million SEK. In the

beginning of the observation period, there was an upward sloping trend in the overall

economy in Sweden. For the years 2005-2007, the GDP was increasing together with

the inflation and the market interest rate, which indicating a boom in the economy.

The decreasing of unemployment rate was also an indicator of a boom in the economy

during this period. This pattern has changed in 2008, which was from the effects of

the global financial crisis. The GDP level has decreased about 5% during the period

of 2008 to 2009. During the same period, the unemployment rate increased about

2.1%. The inflation rate and the market interest rate were decreasing during this time

period, and the overall condition in the economy could be described as a recession.

From 2009 to 2010, the economy was starting to recover from the recession with an

increase in GDP of almost 6%. Although, the unemployment rate continued to

increase approximately of 0.3%, and the market interest rate increased 1%, this still

left the inflation unchanged. The period of 2010 to 2011 followed the same trend with

a slow recovering from the recession. From 2011 to 2014, there were steady

decreasing trends for the market interest rate and the inflation rate, which indicated a

38

slow economy. During this time period, the GDP had a small upward sloping trend,

while the unemployment rate was almost constant.

5.3 Internal Economic Indicators

Figure 3 Internal economic indicators recorded by the Swedish listed

telecommunication companies (NASDAQ OMX Stockholm) during the year of 2005

to 2014

The internal economic indicators were one of the main focuses of this study. Figure 3

shows the overall trend of each of the four internal economic indicators recorded by

the group of five Swedish listed telecommunication companies (NASDAQ OMX

Stockholm) over ten-year period.

In 2005, the total sales amount of this group of telecommunication companies was at

the level of slightly over 140,000 million SEK, and the amount kept increasing over

each year until the year of 2009 that the total sales amount reached almost 180,000

million SEK. During the year of 2009 to 2011, the total sales amounts kept their level

stabilized at approximately 170,000 million SEK. After stabilizing for a while, the

total sales amounts started to fluctuate, which reached its peak in 2012 at slightly over

180,000 million SEK. Moreover, the total amount of operating cash flow of this group

of telecommunication companies followed almost the same pattern of total sales

amount. The total amount of operating cash flow started to moderately increase until

39

the year of 2009 at the level of approximately 50,000 million SEK. During 2009 to

2011, the total operating cash flow has somewhat decreased when compared to those

amounts in 2009, and stabilized afterwards.

The peak amount was reached in the year of 2012, and started to decreased and stayed

at almost the same level of 40,000 million SEK in 2013 and 2014. For the total

amount of earnings of this group of companies, in 2005, the amount was at the level

of slightly below 20,000 million SEK. However, the amount kept moderately

increased each year, until the year of 2010, the total earnings reached its highest point

at approximately 40,000 million SEK. After the year of 2010, the total earnings

started to decrease and stayed at the constant level until 2014. Furthermore, the last

internal economic indicator, which was ROA, was presented with percentage value in

the same figure. In 2005, ROA was at the level of about 6%, and kept increasing with

a slightly fluctuation during 2006 to 2009 until reaching the peak level of

approximately 12% in 2010. After achieving the peak percentage in 2010, the amount

decreased to the level of about 9% in 2011, and stayed at this stable level until 2014.

Consequently from Figure 3, the total amount of sales and operating cash flow

realized by the group of five-listed telecommunication in Sweden follow almost the

same pattern of trend during 2005 to 2014. Referred to this trend, these two total

amounts kept following the upward sloping trends during the time of 2005 to 2011

with some slightly fluctuations, and they reached their highest point in 2012. After the

peak year, these two total amounts started to decrease and stayed at almost stable

level. Besides, the trends of total amounts of earnings and percentage of ROA were

mostly the same. The peak periods for these two indicators were in the year of 2010,

and in the other remaining years, the total amounts were fluctuated with both

increasing and decreasing trends.

40

5.4 Discount Rates and Growth Rates

5.4.1 AllTele AB

Figure 4 Discount rates and growth rates applied by AllTele AB during the year of

2005 to 2014

From Figure 4, the overall amounts and trends of discount rates and growth rates for

AllTele AB were presented. In 2010, the first pre-tax discount rate of AllTele AB was

determined with the rate of 16.28%. During the year after, the discount rate reached

its highest level of almost 18%. Unfortunately, the reason of increase was not

mentioned in the notes to consolidated financial statements. The years thereafter, the

discount rate had a downward sloping trend. In 2012, the discount rate was decreased

to a level that was almost similar to the estimation in 2010. The discount rate was

unchanged in 2013, but followed by another decrease in 2014 when the discount rate

is estimated to be 13.80%. The disclosures about the calculations of the discount rates

were insufficient, even for these years. Moreover, AllTele AB did not declare the

assumptions behind the discount rates, which make it difficult to analyze.

Regarding the growth rates, it was decreased in 2012 from 3% to 2%. The underlying

assumption of the estimated growth rates was the inflation target in Sweden. In the

notes to consolidated financial statements concerning goodwill, AllTele AB claimed

41

that the inflation target in Sweden was 2%, and the expected growth rate should be at

the same basis as this.

5.4.2 DGC One AB

Figure 5 Discount rates and growth rates applied by DGC One AB during the year of

2005 to 2014

Since DGC One AB recognized goodwill as late as in 2011, there were only four

years with discount rates and growth rates to be examined. Concerning about the

discount rates during those years, they relied on the stable discount rate on 12 % for

the years 2011 to 2013. In 2014, DGC One AB decreased their estimated discount

rate from 12% to 10%. The assumptions behind this decrease is that the risk free rate

decreased significantly from 2.35% to 0.97%, while the risk premium in the market

was considered to be unchanged between 2013 and 2014. DGC also made an

assumption about not considering any industry specific risks in the discount rate due

to the low liquidity. And, this was mentioned in the notes to consolidated financial

statements about goodwill.

Additionally, the growth rate of 2% was constant for DGC One AB over the whole

four-year period. In the notes to consolidated financial statements concerning the

issues about goodwill, there was no information disclosed about assumptions behind

the estimated growth rates.

42

5.4.3 Millicom International Cellular SA

Figure 6 Discount rates and growth rates applied by Millicom International Cellular

SA during the year of 2005 to 2014

The percentage amounts and the trends of discount rates and growth rates applied by

Millicom International Cellular SA during 2005 to 2014 were illustrated in Figure 6.

From Figure 6, the discount rates were moderately fluctuated during the earlier years.

In the year of 2005, the discount rate was at the level of approximately 20%, and it

was increased to reach its peak in the year of 2006 at about 22%. Besides, there was a

sharp decrease in the percentage value to about 16% in the later year of 2007, and

started to slightly increase to reach the level of 18%. During the year of 2008 to 2014,

the percentage amounts of growth rates were not considerably fluctuated, even they

kept decreasing. Apparently, there were explicit downward sloping trend of the

overall ten-year period growth rate of Millicom International Cellular SA. And, this is

mainly because of the insignificant changes in the proposed assumptions.

Additionally, the growth rates applied by Millicom International Cellular SA were not

apparently shifted among the years. The growth rates applied were approximately at

the level of 2%. And, the prominent percentage amount of 2.75% was found in the

year of 2013, while the lowest percentage of 1% was in the year of 2009. The

insignificant changes of percentage values of growth rates applied were due to the

43

indistinguishable proposed assumptions and estimations. Therefore, the trend of these

growth rates during 2005 to 2014 was considered to be stable.

5.4.4 Tele2 AB

Figure 7 Discount rates and growth rates applied by Tele2 AB during the year of 2005

to 2014

Figure 7 shows the discount rate and growth rate, which were applied by Tele2 AB

during the ten-year period. For the discount rates, they were used to derive the values

in use, which were the present values of estimated future cash flows. During the year

of 2005 to 2014, the discount rates were kept at mostly stable level of approximately

13%. The prominent discount rates of 14% were applied in the year of 2005, 2006,

and 2011 due to the perceived specific risks in the respective CGUs. The lowest rate

was approximately 11%, and this rate was applied in 2014. In addition, there was

downward sloping trend during the year of 2005 to 2008, and slightly increased in the

percentage, which results in the moderate upward sloping trend during 2009 to 2011.

And finally, during 2012 to 2014, the downward sloping trend was illustrated once

again.

Moreover, the growth rates applied by Tele2 AB during 2005 to 2014 were slightly

fluctuated. The growth rates were ranged between -0.25% and 2.5%. The highest

growth rates applied were in the earlier years of 2005 and 2006, which mainly due to

44

the company’s operations during those years. Besides, the lowest growth rates of -

0.25% were applied during the year of 2011 and 2013. Still, the growth rates during

the year of 2010 and 2012 were also examined to be approximately lower than 0%.

These lowest levels of growth rates were predominantly from the management’s

assessments of market specific risks and opportunities, which included changes in

competition, business models, and regulatory environments.

5.4.5 TeliaSonera AB

Figure 8 Discount rates and growth rates applied by TeliaSonera AB during the year

of 2005 to 2014

Figure 8 illustrates the percentage amounts and the trends of discount rates and

growth rates applied by TeliaSonera AB during the year of 2005 to 2014. For the

discount rates used, they were moderately fluctuated in each year. The fluctuations in

the discount rate of TeliaSonera AB were because of the assumptions and estimations

about the risks, markets, and business operations made by the managements of the

company. The highest discount rate reached the level of approximately 18% in the

year of 2007, while the lowest level of discount rate was approximately 11% in 2006

and 2008, which were the years before and after the world financial crisis. Moreover,

there were not the explicit trends of the discount rates during this ten-year period. The

45

discount rates kept fluctuated between each year with the moderate increased and

decreased in the percentage amounts.

Furthermore, the growth rates applied during ten-year period by TeliaSonera AB were

somewhat indistinct. In the year of 2005, TeliaSonera AB has recognized the amount

of the goodwill and the goodwill impairments, yet the assumptions about growth rates

were not disclosed in the annual report. However, the approximate ten-year period of

growth rates was 2%, because the related assumptions were not considered to

significantly change. The prominent growth rate was applied in the year of 2014 with

the level of about 3%. And, the lowest growth rate of approximately 1% could be

found during the year of 2007 and 2010. Nevertheless, the trend of growth rate

applied by TeliaSonera AB was downward sloping during the earlier years of 2006 to

2008. And in the later years, the upward sloping trend could be easily found, even

there existed some slightly fluctuations.

5.4.6 Overall Discount Rates and Growth Rates

Figure 9 Discount rates and growth rates applied by Swedish listed

telecommunication companies (NASDAQ OMX Stockholm) during the year of 2005

to 2014

Besides from external and internal economic indicators that have been previously

mentioned, the discount rates and growth rates applied by the listed

46

telecommunication companies (NASDAQ OMX Stockholm) were also the

assumptions and explanations that the companies relied on when determining the

goodwill and goodwill impairments in the financial statements. From Figure 9, the

percentage amounts and the trends of discount rates and growth rates during the ten-

year period applied by these companies were illustrated.

In the year of 2005, the average percentage value of discount rate applied by the

group of companies was slightly over 16%. And during 2006 and 2007, the average

discount rates were relatively at the stable level of 16%. Besides, there was a sharp

decrease in the value, which led to the lowest level of somewhat lower than 14% in

the later year of 2008. Not long after, the average discount rates of the group of

companies started to get higher continuously until it reached the level of almost 16%

in the year of 2010. Additionally, the average rates kept decreasing over the year of

2011 to 2013 until it reached the lowest level of slightly over 13% in the year of 2014.

Likewise, the average growth rates of the group of companies were at the almost

stable level of 2%. The lowest level of average growth rate was applied during the

year of 2008 at approximately 1.5%, while the prominent level of the rates applied

during the year of 2006 and 2014 at moderately over 2%.

Subsequently, the trends of discount rates and growth rates were explicitly

demonstrated in Figure 9 as well. The overall trend of average discount rates was

mostly downward sloping, even with some remarkable fluctuations during the year of

2007 to 2010. The significant shift of the average rates was mainly because of the

assumptions concerning the overall economy that the companies have proposed.

Moreover, for the trend of growth rates applied during this ten-year period, the stable

trend could be explicitly examined. The trend was stabilized at about 2%. However,

there were some slightly rises and falls during the year of 2006 to 2009 that could be

found as well.

47

6. Discussions

In this discussions chapter, the associations between external and internal economic

indicators and goodwill impairments will be analyzed separately. Besides, there will

be also another part concerning the reasons and explanations behind the associations

of these two economic indicators and goodwill impairments, which will be illustrated

by the ideas of agency theory and earnings management.

6.1 Associations between External Economic Indicators and Goodwill

Impairments

In the beginning of the period, a decrease of the total goodwill value could be seen,

although, the economy seemed to be in a boom with high level of GDP and a

decreasing unemployment rate. In 2006, there was a decrease of the total amount of

goodwill, as shown in Figure 1, while the GDP was increased and the unemployment

rate was decreased, as presented in Figure 2. One possible explanation for this could

be that the market interest rate during this period was increased (Figure 2), which also

led to high level of the discount rates applied by the companies (Figure 9). This could

be the reason for the decreases of the goodwill during this year.

In 2008, the financial crisis was occurred, which led to decreases of GDP levels and

market interest rates, and increases of unemployment rates, which were strong

indicators of a recession. During this situation, it was interesting that the amounts of

goodwill of the telecommunication companies increased with almost 16%, while the

amounts of goodwill impairments decreased by approximately 24%. Also in this case,

the discount rates applied by the companies seemed to be the explanation for this.

Two of the three companies that had goodwill during this year decreased their

discount rates. This could be compared with the study conducted by Gauffin and

Thörnsten (2010a), where one of the three companies decreased their discount rates.

During this year, the risk-premium in the market was very high and should have had

greater impact than the decreased market interest rate, which was indicating that

companies applied too low discount rates (Gauffin & Thörnsten, 2010a; Carlin &

Finch, 2008; Carlin & Finch, 2009). Therefore, it was remarkable that, during 2008,

two of the three companies decreased their discount rates although the high risk-

48

premium in the market, and it was a logical explanation for the low impairments of

goodwill.

The downward sloping trend in the economy continued in 2009 without significant

increases in impairments of goodwill, although that an increase in the average

discount rate used by the companies could be examined. One possible explanation for

the lack of impairments recognitions during the year of 2009 could be a small

increase in the average growth rates applied by the companies. According to Larrabee

and Voss (2012), the growth rates could represent as much as 50% of the estimated

future values, which could explain that small changes in the growth rates could have a

huge impact on goodwill impairment decisions.

In 2010 and 2011, a recovery of the overall economy could be identified by the

evidences of the increases in GDP and a decreasing unemployment rate. During these

years, the inflation had a downward sloping trend and the market interest rate had a

increasing trend. During 2010 and 2011, the average discount rates applied by the

companies had a decreasing trend, which could be an explanation for low goodwill

impairments. The fact that the discount rates were decreased during these years,

although there was an increase of market interest rate, must be because of a low risk-

premium in the market, otherwise earnings management could be an explanation for

the low discount rates.

First in 2012, significant impairments of goodwill were considered, when almost 8%

of the total goodwill values for the telecommunication companies was impaired.

Relating that to the external economic indicators, the large impairments seemed

difficult to explain. During this year, the GDP level and the unemployment rates were

stable, while both the inflation and the market interest rates were decreasing. As a

result of this, the average discount rate decreased together with a small decrease in the

average growth rate. Interestingly, it was that the large goodwill impairment in 2012

could exclusively be applied to TeliaSonera AB, as illustrated in Tables 5.

TeliaSonera AB had an increased discount rate in 2012, together with an increased

growth rate, which was opposite to the averages of the whole industry. Therefore, the

discount rate and the growth rate of TeliaSonera AB in 2012 did not follow the trends

of external economic indicators, and that made it hard to draw the conclusions from

49

the impairments. The decreased discount rate for TeliaSonera AB was compensated

with an increased growth rate and it was difficult to interpret that as a reason for such

large impairment. One possible explanation, although, might be that impairments

could be delayed. According to Hayn and Hughes (2006), impairments of goodwill

could be delayed by three to four years. Taking four years back from 2012, external

economic indicators indicated a need for impairments, which was a support for the

arguments of the study conducted by Hayn and Hughes (2006).

After 2012, the GDP level was increased, together with a decreased unemployment

rate. During the same time, the market interest rate and the inflation rate were

constantly decreased after 2012. This led to decreased discount rates and the small

increases in the growth rates during the years after 2012, which was also resulting in

the increased goodwill values with small levels of impairments. Interestingly, there

were the increases in growth rates. AllTele AB was the only company that disclosed

their assumptions underlying the growth rates. AllTele AB based their growth rates on

the inflation target in Sweden, which was 2%, but as it could be seen in Figure 2,

there was nothing that indicated the inflation would be somewhere near 2% in the

near future. If the other companies had the same underlying assumptions as AllTele

AB, the growth rates could be questioned, and the high growth rates could be an

explanation for the low impairments these years since the growth rate had a large

impact on the terminal values (Larrabee & Voss, 2012).

As a conclusion of what has been discussed about the associations between the

external economic indicators and goodwill impairments for the years of 2005 to 2014,

the impairments of goodwill did not have any associations that could be expected

from a theoretical point of view. The only significant impairment recognized during

these years could be explicitly identified in 2012, when the external economic

indicators did not show any signs of the demands for impairments of goodwill.

Moreover, this indicated the lacks of associations between the external economic

indicators and goodwill impairments, which were in contrast with the results of the

studies conducted by Beatty and Weber (2006), Chye Loh and Tan (2012), and

Peetathawatchai and Acaranupong (2012). However, the results could, though, be

considered as a confirmation of the studies conducted by Gauffin and Thörnsten

(2010a), Gauffin and Thörnsten (2010b), Gauffin and Wallén, (2011), and Grefberg

50

(2009), which all stated that impairments of goodwill recorded by the Swedish

companies did not follow the trend of the economy.

6.2 Associations between Internal Economic Indicators and Goodwill

Impairments

Besides from the external economic indicators that the company should consider as

the indications of impairments of goodwill, the internal economic indicators,

concerning the company’s performances, should also be taken into accounts as

conditions for the existence of goodwill impairments. Therefore, in this study, the

internal economic indicators are supposed to be associated with the amounts of

goodwill impairments recognized by the selected companies. However, the results of

this study, which are related to the internal economic indicators, are considered to be

in contrast with the expectations about the existences of associations between internal

economic indicators and the goodwill impairments, and also primarily with the

results, which have been concluded in several prior studies of Beatty and Weber

(2006), Chye Loh and Tan (2012), Hayn and Hughes (2006), and Peetathawatchai and

Acaranupong (2012).

Total sales is argued to capture and measure the overall performances of the

company, in conjunction with the idea that the recoverable amounts of the assets

should reflect the true company’s economics (Peetathawatchai & Acaranupong, 2012;

Riedl, 2004), thus the negative associations for total sales amounts and the average

discount rates, also goodwill impairments are predicted (Peetathawatchai &

Acaranupong, 2012). As well as, the positive association for total sales amounts and

the average growth rates applied by the selected companies. From Figure 3 and Figure

9 presented in the previous chapter, the total sales amounts and the average discount

rates applied tended to move negatively against each other during several years of

2005 to 2008, 2011 to 2012, and 2013 to 2014. Moreover, the positive movements

between these two variables can also be found during the rest years of 2008 to 2011

and 2012 to 2013.

Thus, from these results, the trends of associations between these two variables could

not be precisely predicted, as well as the trends of associations between total sales and

51

the applied average growth rates. The total sales amount in each year moved both

positively toward and negatively against the average growth rates over the periods,

and since average growth rates applied were at mostly stable level, the lack of

assumed associations is considered. In addition, even the average discount rates and

growth rates were examined to move in the assumed directions with the total amount

of sales during several years over this ten-year period, still there were no explicit

evidences of those movements. Also, when there were no evidences that could

generate the clear explanations, the amount of goodwill impairments recognized by

the selected companies, as illustrated in Table 1 and Figure 6, could not be assumed to

be associated with the total amount of sales either, and this lead to the confirmation of

the results of the prior study conducted by Hayn and Hughes (2006) and

Peetathawatchai and Acaranupong (2012).

Operating cash flow is another indicator, which is argued to capture the performances

of the companies (Peetathawatchai & Acaranupong, 2012; Riedl, 2004), and predicted

to have a negative association with goodwill impairments recognized by the

companies (Peetathawatchai & Acaranupong, 2012). In between, the operating cash

flow is also examined to be negatively associated with discount rates, and positively

associated with growth rates. Moreover, the operating cash flow recorded by the

company is considered to be the significant indicator of assets impairments according

to the prior study of Peetathawatchai and Acaranupong (2012). However, when

concerning about the results of this study, the operating cash flow recorded by the

selected group of listed telecommunication companies still lacked of influences over

the amount of goodwill impairments.

From Figure 3 and Figure 9 described in previous chapter, total operating cash flow

recorded by selected companies tended to be associated with the average discount

rates and growth rates during the earlier years until the financial crisis year of 2008,

especially when there were negative movements against each of the total operating

cash flow and average discount rates. After the period of financial crisis in 2008, the

total operating cash flow moved in the directions of both positive toward and negative

against the average amount of discount rates and growth rates in each year. Since

there were unpredictable associations between total operating cash flow and average

discount rates, also the average growth rates during this ten-year period, therefore the

52

association between total operating cash flow and goodwill impairments was either

impractical to be explained. Consequently, the results of no associations between

these two variables are in contrast with what have been concluded in the prior study

of Peetathawatchai and Acaranupong (2012) that operating cash flow was an indicator

of goodwill impairments.

Earnings of the company were considered to be the accrual-related performance and

profitability captures of the company, and also argued to have a negative association

with impairments of the assets, which were also practical associations for total sales

and operating cash flow that discussed earlier (Peetathawatchai & Acaranupong,

2012; Riedl, 2004). From this study, the directions of trends between total earnings

and the average discount rates, average growth rates, and especially, the goodwill

impairments were examined to be varied and inconsistent as illustrated in tables and

figures in previous chapter.

During the earlier years before the severe financial crisis in 2008, the earnings were,

somehow, considered to be the influences of the goodwill impairments recognized by

the selected group of the companies. These influences could be explicitly investigated

from the negative associations between the trends of total earnings and average

discount rates, also goodwill impairments. However, the later years after the recovery

from the financial crisis, the associations between total earnings and other variables

were unfeasible to predict and examine. During several years, the positive

associations between these variables could be found, as well as the negative ones.

Moreover, the average growth rates applied by the selected companies were at the

stable level, which were lacked of the assumed positive movements toward total

earnings. Hence, the results from the prior study of Peetathawatchai and Acaranupong

(2012) that the earnings were not considered to be the indicators of assets

impairments were confirmed.

ROA was the interesting and significant indicator of goodwill and assets impairments

in several prior studies. According to the studies of Chye Loh and Tan (2012) and

Hayn and Hughes (2006), ROA was assessed as a crucial determinant of the assets

impairment decisions, and was significant indicator in influencing the amount of

goodwill impairments. Similarly, the average ROA was predicted to have the negative

53

associations with average discount rates and goodwill impairments, and positive one

with average growth rates, comparable to the other internal economic indicators.

However, the results of this study showed that the total ROA recorded by the selected

group of companies was unstable, and its trends of associations with other variables

of average discount rates, average growth rates, and total goodwill impairments, were

more difficult to predict.

Referred to the Figure 3 and Figure 9, while there were the increasing trends of total

ROA during several periods, for instance, 2005 to 2007 and 2008 to 2010, the trends

of average discount rates, average growth rates, and especially goodwill impairments,

were both increasing and decreasing. This made the predictions about the associations

between these variables even more unreachable. Even though, ROA was strongly

argued as related to the assets impairments decisions and the related amounts realized,

the selected group of the companies were examined not to take this indicator into their

accounts while determining their goodwill impairments and this was explicitly

illustrated in the Figure 1 as fluctuated impairment trends. Accordingly, ROA was not

the internal economic indicators that influenced the amounts of goodwill impairments,

and particularly, it was in contrast with the results of the prior studies conducted by

Chye Loh and Tan (2012) and Hayn and Hughes (2006).

Besides, the assumptions behind these amounts of goodwill impairments recognized

by selected group of companies were expressed in the notes to consolidated financial

statements, which included company’s performances, profitability, investment issues,

risks and opportunities, as well as the management’s assessments, the presented

amounts of goodwill impairments in their financial statements were still far from

inclusions of these assumptions. In addition, it was argued in the prior study of Beatty

and Weber (2006) that the companies with poor performances and higher risks in

generating profits tend to recognize higher goodwill impairments. But to be more

specific, Millicom International Cellular SA, for instance, has been recorded almost

no goodwill impairments during these periods of ten years, even there were

remarkable amounts of goodwill, discount rates, and growth rates, and especially the

fluctuations of its performance and profitability. During the downturn period for the

company, such as during 2010 to 2013, due to the theoretical point of views and

arguments from several prior studies, Millicom International Cellular SA should

54

record higher amounts of goodwill impairments. Similarly, Tele2 AB was also

examined to lack of the considerations of internal economic indications, especially

during the later years of 2010 to 2014. During these years, Tele2 AB performed

poorly, comparing to other years, still the goodwill impairments were not recorded.

And in the overall, when these five companies performed good, as can be seen from

the increasing trends of four internal economic indicators, goodwill impairments

recorded were still fluctuated, instead of following continuous decreasing trends as

expected. Accordingly, the argument of Beatty and Weber (2006) about these issues

tended to be in contrast with the results of this study.

Consequently, even it was comprehensively argued in several prior studies that the

internal economic indicators were the significant indications that the companies

concerned when making the decisions of impairments and the related amounts to be

realized in their financial statements, and especially, it was stated in IAS 36 that the

company should assess whether there are any indications of impairments, the results

of this study, inversely, showed that the internal economic indicators were considered

to have no associations with the goodwill impairments recognized by the Swedish

listed telecommunication companies (NASDAQ OMX Stockholm) during the year of

2005 to 2014. Generally, the internal economic indicators were predicted to have

negative associations with the average discount rates and goodwill impairments, and

positive associations with average growth rates. Yet, the results of the study showed

the various trends of these variables during the periods; therefore, the conclusion of

no association between internal economic indicators and goodwill impairments was

affirmed.

6.3 The Overall Associations and the Linkages of Agency Theory and Earnings

Management

As stated in IAS 36 that the company should identify and consider the possible

indications that the assets owned would be impaired. And in this study, the goodwill

impairments recognized by the Swedish listed telecommunication companies

(NASDAQ OMX Stockholm) were examined for the associations with external and

internal economic indicators. However, the results of this study showed that the

goodwill impairments did not have any associations with either external or internal

55

economic indicators during the ten-year period. More specifically for external

economic indicators, even when the overall Swedish economy got worse, for instance,

during 2008 and 2009, the amount of goodwill impairments recognized tended to be

decreased significantly. Also, during the recovery stage of the overall economy as in

2012, the goodwill impairments kept increased remarkably compared to those

recognized in 2011.

Additionally, for the internal economic indicators, especially, during the year of 2009

to 2014, the values of the four internal economic indicators were fluctuated, still the

amount of goodwill recognized tended to fluctuate with the corresponding patterns.

As a consequence, these were considered to be in contrast with the prior studies and

the theoretical point of view. Therefore, the results of this study were explained with

other theories. The lack of disclosure of information related to goodwill and goodwill

impairments in the annual reports is concerned to be based on agency problem (Li &

Sloan, 2012). Also, the companies were superior about the information and the

assumptions behind goodwill valuations, compared to the outsiders, which created a

possibility for them to act in an opportunistic way (Ramanna & Watts, 2012).

Since, IAS 36, the accounting standard concerning the issues of goodwill and

goodwill impairments is considered to be such a subjective standard (EY, 2010; PwC,

2009), which leaves the accounting decisions mainly to the management of the

company. The management has the authority and possibility to decide the amounts of

goodwill impairments to be realized in the financial statements, and are preferable for

them in some ways (AbuGhazaleh et al., 2011; Li & Sloan, 2012). Concerning about

the goodwill impairments recognized by the selected group of the companies in this

study, some of the companies tended to recorded significantly high amounts during

several years, for instance, TeliaSonera AB during 2012 and 2013, and Tele2 AB

during 2006 and 2007, while the other companies as Millicom International Cellular

SA, AllTele AB, and DGC One AB recorded almost no goodwill impairments during

this ten-year period. From this point of view, and especially, together with the poor

disclosures of the information concerning the goodwill impairments in the annual

reports, it could be noticed that these companies were in the situations of principal-

agent relationship complications.

56

More specifically, these agency problems within the companies, based on the results

derived from this study, could lead to the incentives of earnings manipulation by the

management team. As the evidence of the small amounts of goodwill impairments

recognized during the bad years of 2008 to 2010, it could be explained by the fact that

the companies wanted to declare the better results than what were actually performed

(AbuGhazaleh, 2011), and in order to project the long-term earnings of the companies

(Kirschenheiter & Melumad, 2002). Also, the tendency of the smaller amounts of

goodwill impairments recognized during those bad years could also be because the

companies essentially demanded to smooth their income (AbuGhazaleh et al., 2011;

Francis et al., 1996; Pajunen & Saastamoinen, 2013; Riedl, 2004), or because of the

pressures to meet the financial targets, in order to maintain the confidences of their

creditors and investors (Sevin & Schroeder, 2005).

The most significant example of earnings management in this study was the delay of

the goodwill impairments. According to Hayn and Hughes (2006), the management

team could delay goodwill impairments in order to be absolutely confident about the

future economic outcomes, and therefore, the management team preferred to refuse

recognizing the goodwill impairments before the economic outcome was certain.

More particularly, the high amount of goodwill impairment recorded by TeliaSonera

AB during 2012 was noticed to follow this pattern of postponement, since the

goodwill impairment was realized a couple of years after the severe financial crisis

year of 2008 to 2010. Additionally, the external and internal economic indicators, in

this study, did not indicate any special need for goodwill impairment during 2012, and

it was more reasonable to believe that the high goodwill impairment was recognized

because of the severe financial crisis years rather than any other reasons. Besides, the

poor disclosure of information about goodwill impairments in the annual reports of

TeliaSonera AB was difficult to indicate the reasons, but according to the trends of

external and internal economic indicators of this study, it was reasonable to explain

with the findings of Hayn and Hughes (2006).

57

7. Conclusions and Further Research

In this chapter, the conclusions were drawn from the main findings, which are also

based on the theoretical framework, as well as the discussion in the previous chapter.

Also, the future research suggestions are presented.

7.1 Conclusions

Since the economic indicators are mentioned in IAS 36 as the indications that the

company is required to consider for the existences of goodwill impairments, this study

was then conducted in order to examine how are the associations between goodwill

impairments recorded by the listed telecommunication companies in Sweden

(NASDAQ OMX Stockholm) and the external and internal economic indicators. And,

the results of this study revealed that the explicit associations between external

economic indicators and goodwill impairments could not be identified, and they did

not have any significant influences over the values of goodwill impairments recorded

by selected companies during the ten-year period of 2005 to 2014. On the other

words, the values of goodwill impairments did not follow the trends of Swedish

economy as predicted. Besides from the external economic indicators, the results of

the study also revealed that the internal economic indicators were not associated with

the values of goodwill impairments. The directions of associations between goodwill

impairments and the four internal economic indicators could not be explicitly

identified. Therefore, the assumed associations between goodwill impairments and the

internal economic indicators could not be precisely predicted, and the conclusion of

no associations was affirmed, even it seemed like the selected companies have tried to

mention something about the assumptions behind the recognized amounts of goodwill

impairments in their notes to consolidated financial statements.

Even they were stated that economic indicators should be taken into accounts and

were significant in indicating goodwill impairments of the company, this study still

showed the adverse results, because of the unpredictable associations. However, the

agency theory and earnings management could explain this lack of associations

between goodwill impairments and the external and internal economic indicators.

Management of the company relies on different purposes, especially, on the

58

subjective one when evaluating goodwill and its related impairments. The

management desires to declare a better result in order to project long-term earnings,

smooth incomes, and even maintain confidences of the creditors and investors. And,

this was considered as an agency problem within the company, especially together

with the poor disclosures of the information concerning goodwill and goodwill

impairments in the annual reports that were also inspected in this study. Specifically,

this agency problem led to the possible incentives of the management to manipulate

earnings of the company in their own preferable ways, and this could be noticed by

the evidences of fluctuated values of goodwill impairments recorded during the whole

period of ten years. Moreover, the most significant sign of earnings management in

this study was the high value of goodwill impairments recorded during 2012, which

was from a delay of impairment for couple of years after severe financial crisis in

2008. And, this was also because the management of the company wanted to be

absolutely sure about the economic consequences.

7.2 Suggestions for Further Research

This study was conducted based on the sample of five Swedish telecommunication

companies listed on NASDAQ OMX Stockholm. Because of this small sample, it was

hard for us to generalize the findings of this study, and therefore, the quantitative

research approach concerning the statistical testing, for instance, the regression and

correlation analysis, together with the larger sample, would be one way to investigate

this further, and be able to draw more precise and reliable conclusions. Since only

listed companies in the telecommunication industry were investigated in this study, it

would also be interesting if the similar study was conducted and included other

industries to examine the possible differences among these industries, and if the

associations between goodwill impairments and the external and internal economic

indicators could be found. Additionally, another interesting possibility would be to

conduct the interviews with management teams of the companies in order to further

observe about the possible assumptions behind the goodwill impairment testing rather

than the economic indicators, since the disclosures of related information in the

annual reports are poor and insufficient. And, this could lead to the deeper insights

into which factors could affect the decisions and the true values of goodwill

impairments recorded by the companies.

59

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64

Appendices

Appendix 1 - Goodwill (MSEK) recorded by the Swedish listed telecommunication

companies (NASDAQ OMX Stockholm) during the year of 2005 to 2014

Year Millicom

International

Cellular SA

Tele2 AB TeliaSonera

AB

AllTele

AB

DGC

One AB

Total

2005 547.91 26,702.00 62,498.00 - - 89,747.91

2006 1,445.83 18,491.00 62,638.00 - - 82,574.83

2007 1,242.87 12,603.00 71,172.00 - - 85,017.87

2008 3,343.07 11,473.00 84,431.00 - - 99,247.07

2009 4,192.09 10,179.00 85,737.00 8.73 - 100,116.82

2010 10,294.62 10,010.00 77,207.00 38.13 - 97,549.75

2011 9,196.58 10,510.00 76,850.00 80.93 23.00 96,660.52

2012 10,224.24 10,174.00 69,162.00 76.24 23.00 89,659.48

2013 9,257.22 9,537.00 67,313.00 125.66 23.00 86,255.88

2014 21,032.76 9,503.00 70,895.00 125.66 23.00 101,579.42

65

Appendix 2 - Goodwill impairments (MSEK) recorded by the Swedish listed

telecommunication companies (NASDAQ OMX Stockholm) during the year of 2005

to 2014

Year Millicom

International

Cellular SA

Tele2 AB TeliaSonera

AB

AllTele

AB

DGC One

AB

Total

2005 14.60 278.00 - - - 292.60

2006 - 3,300.00 5.00 - - 3,305.00

2007 - 1,315.00 10.00 - - 1,325.00

2008 19.06 986.00 - - - 1,005.06

2009 - 5.00 4.00 - - 9.00

2010 - - 174.00 - - 174.00

2011 - - - - - -

2012 - 88.00 7,552.00 4.69 - 7,644.69

2013 0.23 - 1,171.00 - - 1,171.23

2014 - - 753.00 - - 753.00

66

Appendix 3 - Summary of external economic indicators during the year of 2005 to

2014 in Sweden

Year Market Interest Rate Inflation Rate Unemployment Rate GDP (MSEK)

2005 2% 1% 8% 3,365,570.00

2006 3% 2% 7% 3,523,352.00

2007 4% 2% 6% 3,643,320.00

2008 2% 3% 6% 3,623,025.00

2009 0% 2% 8% 3,435,184.00

2010 1% 2% 9% 3,640,914.00

2011 2% 1% 8% 3,737,923.00

2012 1% 1% 8% 3,727,220.00

2013 1% 0% 8% 3,775,016.00

2014 0% 0% 8% 3,855,648.00

67

Appendix 4 - Sales (MSEK) recorded by the Swedish listed telecommunication

companies (NASDAQ OMX Stockholm) during the year of 2005 to 2014

Year Millicom

International

Cellular SA

Tele2 AB TeliaSonera

AB

AllTele

AB

DGC One

AB

Total

2005 6,893.17 49,943.00 87,661.00 8.70 95.47 144,601.34

2006 11,615.12 50,306.00 91,060.00 16.74 130.20 153,128.06

2007 17,782.95 43,420.00 96,344.00 41.44 223.19 157,811.58

2008 20,762.18 39,505.00 103,585.00 169.34 238.08 164,259.60

2009 25,801.36 39,265.00 109,550.00 229.38 262.52 175,108.26

2010 28,265.00 40,164.00 106,979.00 372.44 296.33 176,076.77

2011 29,445.00 40,750.00 104,354.00 610.33 380.07 175,539.40

2012 32,638.92 43,726.00 104,898.00 764.47 424.10 182,451.48

2013 33,585.09 29,871.00 101,700.00 779.15 498.30 166,433.54

2014 43,807.96 25,955.00 101,060.00 885.72 545.23 172,253.90

68

Appendix 5 - Operating cash flow (MSEK) recorded by the Swedish listed

telecommunication companies (NASDAQ OMX Stockholm) during the year of 2005

to 2014

Year Millicom

International

Cellular SA

Tele2 AB TeliaSonera

AB

AllTele AB DGC One

AB

Total

2005 2,384.33 5,487.00 26,990.00 -2.55 23.88 34,882.66

2006 3,799.38 3,847.00 27,501.00 -7.88 35.53 35,175.03

2007 5,749.60 4,350.00 26,529.00 6.15 43.39 36,678.14

2008 6,970.49 7,896.00 27,086.00 37.50 65.25 42,055.24

2009 9,369.94 9,118.00 30,991.00 38.07 66.67 49,583.68

2010 9,891.31 9,610.00 27,434.00 35.22 60.61 47,031.14

2011 10,471.50 9,248.00 27,023.00 69.52 81.56 46,893.59

2012 10,746.30 8,679.00 38,879.00 -35.28 72.11 58,341.13

2013 7,877.10 5,813.00 31,036.00 67.98 117.08 44,911.16

2014 10,001.88 4,578.00 29,252.00 56.17 133.91 44,021.96

69

Appendix 6 - Earnings (MSEK) recorded by the Swedish listed telecommunication

companies (NASDAQ OMX Stockholm) during the year of 2005 to 2014

Year Millicom

International

Cellular SA

Tele2 AB TeliaSonera

AB

AllTele

AB

DGC One

AB

Total

2005 45.57 2,619.00 13,694.00 -4.79 9.33 16,363.11

2006 1,179.08 -440.00 19,288.00 -9.60 1.50 20,018.97

2007 4,964.15 -454.00 20,308.00 -6.70 10.13 24,821.58

2008 2,684.32 3,419.00 21,442.00 2.27 18.70 27,566.29

2009 6,150.08 4,560.00 21,284.00 5.85 26.18 32,026.11

2010 11,932.00 6,928.00 23,736.00 7.73 29.65 42,633.38

2011 7,338.53 4,897.00 21,072.00 -18.23 30.94 33,320.23

2012 3,417.12 3,352.00 28,720.00 -3.48 34.11 35,519.75

2013 1,334.78 14,590.00 17,938.00 40.25 48.04 33,951.08

2014 19,214.86 2,211.00 16,352.00 23.58 54.08 37,855.52

70

Appendix 7 - ROA recorded by the Swedish listed telecommunication companies

(NASDAQ OMX Stockholm) during the year of 2005 to 2014

Year Millicom

International

Cellular SA

Tele2 AB TeliaSonera

AB

AllTele

AB

DGC One

AB

Total

2005 0.24% 3.84% 6.72% -53.65% 10.67% 5.62%

2006 4.82% -0.67% 9.67% -50.50% 1.23% 6.90%

2007 16.64% -0.93% 9.37% -6.49% 7.30% 8.40%

2008 7.80% 7.25% 8.11% 1.27% 9.97% 7.96%

2009 13.42% 11.29% 7.89% 2.66% 11.36% 8.99%

2010 23.66% 17.16% 9.47% 3.01% 12.94% 12.47%

2011 15.50% 10.53% 8.30% -3.22% 10.52% 9.56%

2012 6.14% 6.81% 11.29% -0.76% 11.58% 9.87%

2013 2.24% 36.61% 7.09% 6.63% 13.36% 9.61%

2014 21.06% 5.55% 6.01% 4.22% 13.48% 9.37%

71

Appendix 8 - Discount rates applied by the Swedish listed telecommunication

companies (NASDAQ OMX Stockholm) during the year of 2005 to 2014

Year Millicom

International

Cellular SA

Tele2 AB TeliaSonera

AB

AllTele

AB

DGC One

AB

Average

2005 20.83% 14.00% 14.24% - - 16.36%

2006 22.50% 14.00% 11.25% - - 15.92%

2007 15.97% 13.50% 18.47% - - 15.98%

2008 18.13% 12.00% 11.31% - - 13.81%

2009 17.64% 12.14% 13.20% - - 14.33%

2010 16.76% 13.13% 15.26% 16.28% - 15.36%

2011 15.33% 14.00% 13.53% 17.64% 12.00% 14.50%

2012 15.33% 13.10% 15.17% 14.50% 12.00% 14.02%

2013 15.79% 13.14% 12.29% 14.50% 12.00% 13.54%

2014 14.73% 11.71% 15.91% 13.80% 10.00% 13.23%

72

Appendix 9 - Growth rates applied by the Swedish listed telecommunication

companies (NASDAQ OMX Stockholm) during the year of 2005 to 2014

Year Millicom

International

Cellular SA

Tele2 AB TeliaSonera

AB

AllTele

AB

DGC One

AB

Average

2005 1.50% 2.50% - - - 2.00%

2006 1.50% 2.50% 2.33% - - 2.11%

2007 1.50% 1.50% 1.70% - - 1.57%

2008 1.50% 1.00% 1.44% - - 1.31%

2009 1.00% 1.50% 2.67% - - 1.72%

2010 2.00% -0.50% 1.90% 3.00% - 1.60%

2011 2.00% -0.25% 2.49% 3.00% 2.00% 1.85%

2012 2.00% -0.40% 2.60% 2.00% 2.00% 1.64%

2013 2.75% -0.25% 2.40% 2.00% 2.00% 1.78%

2014 2.25% 1.00% 3.23% 2.00% 2.00% 2.10%