Evidence on the Use of Unverifiable Estimates in Required Goodwill Impairment

50 Pages Posted: 21 May 2008 Last revised: 12 Jun 2012

Karthik Ramanna

Harvard University - Harvard Business School; University of Oxford - Blavatnik School of Government

Ross L. Watts

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Date Written: January 31, 2011

Abstract

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.

Keywords: agency theory, goodwill impairment, fair-value accounting, FASB, SFAS 142

JEL Classification: M41, M43, M44, M46, D82, G38, K22

Suggested Citation

Ramanna, Karthik and Watts, Ross L., Evidence on the Use of Unverifiable Estimates in Required Goodwill Impairment (January 31, 2011). Review of Accounting Studies, Vol. 17, No. 4, 2012; Harvard Business School Accounting & Management Unit Working Paper No. 09-106. Available at SSRN: https://ssrn.com/abstract=1134943

Karthik Ramanna (Contact Author)

Harvard University - Harvard Business School ( email )

Boston, MA 02163
United States

University of Oxford - Blavatnik School of Government ( email )

10 Merton St
Oxford, Oxfordshire OX1 4JJ
United Kingdom

Ross L. Watts

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

E52-325
Cambridge, MA 02142
United States

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