Functional Fixation Surrounding the Adoption of SFAS 142

15 Pages Posted: 14 Dec 2013

See all articles by George Wilson

George Wilson

Northern Michigan University

James C. Hansen

Weber State University Goddard School of Business and Economics

Date Written: May 2012

Abstract

Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangibles (FASB 2001) altered the treatment of goodwill by replacing the systematic amortization of goodwill with impairment testing. This change affected earnings in two ways by requiring many firms to take sizable goodwill impairments if they cannot justify the amount of goodwill being carried on their balance sheets and by producing a “cosmetic” boost to the earnings of all firms who previously amortized goodwill. This study investigates whether investors assign value relevance to adoption-year goodwill impairments and to the increase in earnings resulting from goodwill non-amortization. Furthermore, this study investigates whether the assigned value relevance is due to new information content or due to functional fixation. Results indicate that unsophisticated investors functionally fixate on earnings while sophisticated investors do not, and that investors find value relevant information in goodwill impairments.

Keywords: Earnings Fixation, Functional Fixation, SFAS 142, Goodwill

JEL Classification: M41, M48, G11, G14

Suggested Citation

Wilson, George and Hansen, James C., Functional Fixation Surrounding the Adoption of SFAS 142 (May 2012). Available at SSRN: https://ssrn.com/abstract=2366893 or http://dx.doi.org/10.2139/ssrn.2366893

George Wilson (Contact Author)

Northern Michigan University ( email )

Marquette, MI
United States

James C. Hansen

Weber State University Goddard School of Business and Economics ( email )

1337 Edvalson St. Dept 3803
Ogden, UT 84408
United States
801-626-6433 (Phone)

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