Has Goodwill Accounting Gone Bad?

54 Pages Posted: 3 Sep 2009 Last revised: 27 Jan 2017

See all articles by Kevin K. Li

Kevin K. Li

Santa Clara University

Richard G. Sloan

University of Southern California - Leventhal School of Accounting

Date Written: January 23, 2017


Prior to SFAS 142, goodwill was subject to periodic amortization and a recoverability-based impairment test. SFAS 142 eliminates periodic amortization and imposes a 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 has resulted 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, in practice, some managers have exploited the discretion afforded by SFAS 142 to delay goodwill impairments, causing earnings and stock prices to be temporarily inflated.

Keywords: goodwill impairment, SFAS 142, accounting discretion, fair value accounting, resource misallocation

JEL Classification: G14, M41, M48

Suggested Citation

Li, Kevin K. and Sloan, Richard G., Has Goodwill Accounting Gone Bad? (January 23, 2017). Review of Accounting Studies, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1466271 or http://dx.doi.org/10.2139/ssrn.1466271

Kevin K. Li (Contact Author)

Santa Clara University ( email )

500 El Camino Real
Santa Clara, CA 95053
United States

Richard G. Sloan

University of Southern California - Leventhal School of Accounting ( email )

Los Angeles, CA 90089-0441
United States

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