Causes and Consequences of “Discretionary” Goodwill Impairments

• In Event: Accounting Policies and Financial Reporting

Abstract

Recent empirical research after the enactment of SFAS 142, “Goodwill and Other Intangible Assets,” provides evidence that managers use the discretion afforded under the new rule to manage goodwill impairments. In this paper, we examine a group of firms with discretionary goodwill impairments to determine whether or not there exist contextual factors that inhibit managers’ decision choices. While we find no association between these factors and managers’ reporting choices, we find evidence that firms with discretionary goodwill impairments experience poor stock return performance in the short term compared to firms with non-discretionary impairments. We also find evidence that firms with discretionary impairments outperform their counterparts in the long term. In light of the FASB’s recent discussions on amortization versus impairment of goodwill, these findings are important for our understanding of managers’ reporting choices under the current rule.

Authors

• Rosemond Desir, University of St. Thomas

• Julia Kokina, University of Texas at El Paso

• Ray J. Pfeiffer, Texas Christian University