Has Goodwill Accounting Under SFAS 142 Improved Financial Reporting?

Abstract:     
SFAS 142 made two significant changes to goodwill accounting. First, firms are required to annually test goodwill for impairment. Second, firms are prohibited from systematically amortizing goodwill. In this study, I test whether each of these changes resulted in improved financial reporting, as predicted by the FASB. I find evidence that annual impairment testing improves financial reporting. However, I also find evidence that elimination of systematic amortization reduced the quality of financial reporting. As additional analysis, I demonstrate that a goodwill accounting system that allows both annual impairment testing and systematic amortization, while allowing firms the discretion to choose a firm-specific mix of each, provides the most value relevant goodwill accounting numbers.

Number of Pages in PDF File: 46

Keywords: goodwill, impairment, amortization, valuation

JEL Classification: M41

working papers series