The Importance of Accounting Discretion in Mandatory Accounting Changes: An Examination of the Adoption of SFAS 142
52 Pages Posted: 3 Feb 2005
Date Written: January 10, 2005
Abstract
This study examines SFAS 142 adoption decisions focusing on the trade-off between recording certain current goodwill impairment charges below-the-line versus uncertain future impairment charges included in income from continuing operations. We examine several potentially important economic incentives that firms face when making this accounting choice. We find evidence suggesting that firms' asset pricing considerations affect their preference for above-the-line vs. below-the-line accounting treatment, and firms' debt contracting, bonus, turnover and exchange delisting incentives affect their decisions to accelerate or delay expense recognition. We also examine the disclosures of the method used to calculate fair values and provide preliminary evidence that the extent of disclosure is associated with the accounting choices made when adopting SFAS 142. Our study contributes to the accounting choice literature by examining the manager's use of discretion when adopting a mandatory accounting change and by developing and testing explicit cross-sectional hypotheses of the determinants of firm's preferences for immediate below-the-line versus delayed above-the-line expense recognition.
Keywords: earnings management, accounting choice, mandatory accounting changes, goodwill, mergers and acquisitions, FASB, positive accounting
JEL Classification: M41, M43, M44, M45
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
The Effect of International Institutional Factors on Properties of Accounting Earnings
By Ray Ball, S.p. Kothari, ...
-
The Relevance of the Value Relevance Literature for Financial Accounting Standard Setting
-
Conservatism in Accounting - Part I: Explanations and Implications
-
International Differences in the Timeliness, Conservatism and Classification of Earnings
By Peter F. Pope and Martin Walker
-
By Ray Ball, Ashok Robin, ...
-
Corporate Financial Statements, a Product of the Market and Political Processes
-
Conservatism in Accounting - Part Ii: Evidence and Research Opportunities
-
Earnings Quality in U.K. Private Firms
By Ray Ball and Lakshmanan Shivakumar