Has Goodwill Accounting Gone Bad?
Kevin K. Li
University of Toronto - Rotman School of Management
Richard G. Sloan
University of California at Berkeley - Haas School of Business
September 1, 2009
CAAA Annual Conference 2011
Prior to SFAS 142, goodwill was subject to periodic amortization and a recoverability-based impairment test. SFAS 142 eliminates periodic amortization and imposes a more stringent periodic fair-value-based impairment test. We examine the impact of this standard on the accounting for and valuation of goodwill. Our results indicate that the new standard results in relatively inflated goodwill balances and untimely impairments. We also find that investors do not appear to fully anticipate the untimely nature of post SFAS 142 goodwill impairments. Overall, our results suggest that managers exploit the discretion afforded by SFAS 142 to delay goodwill impairments, causing earnings and stock prices to be temporarily inflated.
Number of Pages in PDF File: 52
Keywords: goodwill impairment, SFAS 142, accounting discretion, fair value accounting, resource misallocation
JEL Classification: G14, M41, M48working papers series
Date posted: September 3, 2009 ; Last revised: February 20, 2013
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