Evidence on the Use of Unverifiable Estimates in Required Goodwill Impairment
Harvard University - Harvard Business School
Ross L. Watts
Massachusetts Institute of Technology (MIT) - Sloan School of Management
January 31, 2011
Review of Accounting Studies, Vol. 17, No. 4, 2012
Harvard Business School Accounting & Management Unit Working Paper No. 09-106
SFAS 142 requires managers to estimate the current fair value of goodwill to determine goodwill write-offs. In promulgating the standard, the FASB predicted managers will, on average, use the fair value estimates to convey private information on future cash flows. The current fair value of goodwill is unverifiable because it depends in part on management’s future actions (including managers’ conceptualization and implementation of firm strategy). Thus, agency theory predicts managers will, on average, use the discretion in SFAS 142 consistent with private incentives. We test these hypotheses in a sample of firms with market indications of goodwill impairment. Our evidence, while consistent with some agency-theory derived predictions, does not confirm the private information hypothesis.
Number of Pages in PDF File: 50
Keywords: agency theory, goodwill impairment, fair-value accounting, FASB, SFAS 142
JEL Classification: M41, M43, M44, M46, D82, G38, K22
Date posted: May 21, 2008 ; Last revised: June 12, 2012
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