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

46 Pages Posted: 27 Sep 2019 Last revised: 14 Jul 2021

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: July 14, 2021

Abstract

This study examines if financial reporting for income tax expense affects the timeliness of goodwill impairments. 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, whereas tax laws generally do not permit impairment deductions but require amortization for only some goodwill. Only when an impairment includes tax-amortizable goodwill will financial statement tax benefits partially offset the impairment’s negative effect on GAAP net income. Holding the size of pre-tax impaired goodwill constant and controlling for attributes of firms’ prior acquisitions, we predict and find that managers are more likely to delay impairments when the offsetting financial statement tax benefits are smaller. We estimate goodwill impairments are 15 to 20 percent more likely to be delayed when impairments generate reduced financial reporting tax benefits. Our findings suggest financial reporting for taxes potentially distorts the timeliness of goodwill impairments, informing the current debate on goodwill accounting.

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 Financial Reporting for Income Tax Expense Affect the Timeliness of Goodwill Impairments? (July 14, 2021). 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

HOME PAGE: http://wsb.wisc.edu/directory/students/phd/students/zachary-king

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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