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Management’s Reporting Incentives and Goodwill Impairments Under SFAS No. 142
Kang Cheng, Howard University
Yu Cong, Towson University
ABSTRACT. This paper studies the association between goodwill impairments under SFAS No. 142 and management’s reporting incentives. By examining this association, we examine whether goodwill impairments under SFAS No. 142 are more closely associated with the underlying economics captured by the implied fair value of goodwill or with management’s reporting incentives. This study focuses on goodwill impairments as a regular earnings component. Of particular interest is to assess whether goodwill accounting under SFAS No. 142 better reflects the underlying economics as was meant by the statement. Or, the additional discretion in goodwill impairments provides another vehicle for earnings management. The empirical results fail to demonstrate the association between goodwill impairments and economic factors, but show strong association with management’s reporting incentives. These results suggest that goodwill accounting under the impairment method does not reach the effects intended by the statement.
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