The Effect of SFAS 142 on the Ability of Goodwill to Predict Future Cash Flow

48 Pages Posted: 9 Oct 2010 Last revised: 11 Oct 2010

Date Written: October 8, 2010

Abstract

This study examines the effect of Statement of Financial Accounting Standards No.142 (SFAS 142) on the ability of goodwill to predict future cash flows. SFAS 142 allows substantial managerial discretion and leads to a significant magnitude of economic impact on financial statements, resulting in critical debates over the consequence of its adoption. I find that the ability of goodwill to predict future cash flows has improved since the Financial Accounting Standards Board (FASB) adopted SFAS 142. Furthermore, sub-sample analyses fail to reveal compelling evidence that reporting discretion induced by SFAS 142 is used opportunistically or informatively, contrasting with the pervasive view based on the opportunistic reporting hypothesis. Overall, contrary to the position of critics of SFAS 142, the results support the view taken by the FASB and proponents of SFAS 142: eliminating systematic amortization and adopting fair value estimates improve representational faithfulness of goodwill reporting.

Keywords: Goodwill, SFAS 142, Predicting Future Cash Flows, Principles-based Accounting

JEL Classification: M40

Suggested Citation

Lee, Cheol, The Effect of SFAS 142 on the Ability of Goodwill to Predict Future Cash Flow (October 8, 2010). Journal of Accounting and Public Policy, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1689586

Cheol Lee (Contact Author)

Wayne State University ( email )

United States
313-577-2242 (Phone)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
401
Abstract Views
1,712
rank
103,873
PlumX Metrics