Articlebronze2010

Goodwill Impairment: A New Window For Earnings Management?

Yousef Jahmani · William A. Dowling · Paul D. Torres

44 citations0/0 files storedJournal of Business & Economics Research (JBER)

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Auditing, Earnings Management, Governance Accounting Theory and Financial Reporting Corporate Governance and Financial Management

Abstract

The Financial Accounting Standards Board promulgated standard No. 142 in an attempt to improve the understandability of accounting information. This new rule eliminated the practice of automatically amortizing goodwill. No. 142 requires public companies to test goodwill for possible impairment at least annually. An unintended consequence of this new standard is the opportunity for companies to use it in earnings management. To test the possibility that the rule is being used for this purpose, a sample of companies was chosen, all of which had amounts of goodwill on their balance sheet during the 2003-2005 interval. The results reveal that the number of companies experiencing losses or low rates of return on total assets who actually impaired goodwill was statistically insignificant during the period under consideration. Thus, the results strongly suggest that companies are using No. 142 in an attempt to manage the volatility of earnings.

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References

2000Valuation of the Components of Purchased Goodwill 2005Earnings Management: An Executive Perspective 2003Accounting for Goodwill: Are We Better Off?1995Market Perception of Goodwill: Some Empirical Evidence 1993An Empirical Investigation of Accounting Methods for Goodwill and Identifiable Intangible Assets: 1985 to 1989

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2013Better Late than Never, the Timing of Goodwill Impairment Testing in Australia 2016Value Relevance vis-à-vis Disclosure on Business Combinations and Goodwill Recognized by Publicly Traded Brazilian Companies 2016Goodwill and Mandatory Disclosure Compliance: A Critical Review of the Literature

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