The Importance of Accounting Discretion in Mandatory Accounting Changes: An Examination of the Adoption of SFAS 142

52 Pages Posted: 3 Feb 2005

See all articles by Anne Beatty

Anne Beatty

Ohio State University (OSU) - Department of Accounting & Management Information Systems

Joseph Weber

Massachusetts Institute of Technology (MIT) - Sloan School of Management

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

Beatty, Anne L. and Weber, Joseph Peter, The Importance of Accounting Discretion in Mandatory Accounting Changes: An Examination of the Adoption of SFAS 142 (January 10, 2005). Available at SSRN: https://ssrn.com/abstract=646201 or http://dx.doi.org/10.2139/ssrn.646201

Anne L. Beatty

Ohio State University (OSU) - Department of Accounting & Management Information Systems ( email )

2100 Neil Avenue
Columbus, OH 43210
United States

Joseph Peter Weber (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States
617-253-4310 (Phone)

Register to save articles to
your library

Register

Paper statistics

Downloads
1,202
Abstract Views
5,858
rank
16,620
PlumX Metrics