Cash Relevance of Goodwill Impairments on Operating Cash Flows Prediction

• In Event: Dialogue Session 1
  In Dialogue Session: Dialog Session I

Abstract

We consider whether goodwill impairment information, first required by FASB in 2001, aids in the predictability of future operating cash flows. Building on the framework of Barth, Cram, and Nelson (2001), we find that explicitly including goodwill impairments incrementally improves cash flow prediction. This finding is present over the entire 2001-2009 prediction period, and it is also individually present in eight of the nine years within the sample period. Of particular interest is the large increase in the cash relevance of goodwill impairments in 2007, the year preceding the economic crisis which began in 2008. Our findings suggest that analysts and others interested in predicting the cash flows of an enterprise should include goodwill impairments information, when available, to assist in predicting future cash flows.

Authors

• Eric D. Bostwick, University of West Florida

• Kevin Krieger, University of West Florida

• Sherwood Lane Lambert III, University of West Florida