Does the Financial Reporting for Income Tax Expense Affect Financial Reporting Quality? Evidence from the Timeliness of Goodwill Impairments

52 Pages Posted: 27 Sep 2019

See all articles by Zachary King

Zachary King

University of Wisconsin - Madison

Dan Lynch

University of Wisconsin - Madison - Department of Accounting and Information Systems

Bridget Stomberg

Indiana University - Kelley School of Business

Steven Utke

University of Connecticut - Department of Accounting

Date Written: September 17, 2019

Abstract

Goodwill impairments are an important signal of expected future cash flows, yet their timing is subject to managers’ discretion. U.S. GAAP requires firms to test all goodwill for impairment but tax laws worldwide do not always allow goodwill deductions. As such, financial reporting tax benefits partially offset the negative GAAP earnings effect of impairments only for tax-amortizable goodwill and not for impairments of non-tax-amortizable goodwill. Holding the size of the impairment constant, the GAAP net income effect is therefore more negative for impairments of non-tax-amortizable goodwill than impairments of tax-amortizable goodwill. We predict and find that impairments of tax-amortizable goodwill are 16 to 20 percent less likely to be delayed than impairments of non-tax-amortizable goodwill. We also find impairments of tax-amortizable goodwill are more delayed when firms record valuation allowances that negate financial reporting tax benefits. Our findings suggest financial reporting for taxes potentially distort the timeliness of goodwill impairments.

Keywords: Mergers and Acquisitions, Goodwill, Tax, Impairment, Intangible, Earnings Quality

JEL Classification: G34, K34, M41

Suggested Citation

King, Zachary and Lynch, Dan and Stomberg, Bridget and Utke, Steven, Does the Financial Reporting for Income Tax Expense Affect Financial Reporting Quality? Evidence from the Timeliness of Goodwill Impairments (September 17, 2019). Available at SSRN: https://ssrn.com/abstract=3455659 or http://dx.doi.org/10.2139/ssrn.3455659

Zachary King (Contact Author)

University of Wisconsin - Madison ( email )

Madison, WI
United States

Dan Lynch

University of Wisconsin - Madison - Department of Accounting and Information Systems ( email )

School of Business
975 University Avenue
Madison, WI 53706
United States

Bridget Stomberg

Indiana University - Kelley School of Business ( email )

1309 East Tenth Street
Indianapolis, IN 47405-1701
United States

Steven Utke

University of Connecticut - Department of Accounting ( email )

School of Business
Storrs, CT 06269-2041
United States

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