Evidence on the use of unverifiable estimates in required goodwill impairment

By K. Ramanna, Ross L. Watts. Review of accounting studies, 2012

559 citations recorded by the source corpus.

SFAS 142 requires managers to estimate the current fair value of goodwill to determine goodwill write-offs. In promulgating the standard, the FASB predicted that managers will, on average, use the fair-value estimates to convey private information on future cash flows. The current fair value of goodwill is unverifiable because it depends in part on management’s future actions (including managers’ conceptualization and implementation of firm strategy). Agency theory predicts managers will, on average, use the unverifiable discretion in SFAS 142 consistent with private incentives. We test these hypotheses in a sample of firms with market indications of goodwill impairment. Our evidence, while consistent with some agency-theory based predictions, does not confirm the private information hypothesis.

Subfields: Accounting, Strategy and Management

View Paper: https://www.semanticscholar.org/paper/4557fe3363352353ef766b4aa5ca1725926b997d

Citations in the corpus

• Does fair value accounting for non-financial assets pass the market test? (2013, unknown): “…is consistent with opportunistic revaluations of non-financial assets documented in settings where fair value accounting is mandatory (e.g., Ramanna and Watts 2012) and the acclaimed opportunism in revaluations in the 1920s, which initially motivated the SEC to ban upward revaluations in…”
• Managerial Ability and Income Smoothing (2019, unknown): “Consistent with our view, existing empirical evidence shows that asset write-offs reflect managers’ opportunistic reporting behavior rather than the provision of their private information (Riedl 2004; Ramanna and Watts 2012).”
• Corporate investment and changes in GAAP (2016, unknown): “Although number of studies show that managers use the discretion allowed by SFAS 142 opportunistically (e.g., Ramanna and Watts 2012), such behavior is not indicative of whether the internal estimates of the value of goodwill used by managers improved or worsened.”
• Do key audit matters impact financial reporting behavior? (2020, unknown): “14 Prior research on goodwill impairment shows that financial statement preparers use goodwill impairment decisions to engage in earnings management activities as it is difficult to valuate for third parties (Ramanna, 2008; Ramanna & Watts (2012).”