Has Goodwill Accounting Gone Bad?

Abstract:     
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, M48

working papers series