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Rev Account Stud (2012) 17:749780 DOI 10.1007/s11142-012-9188-5
Karthik Ramanna Ross L. Watts
Published online: 23 May 2012 Springer Science+Business Media, LLC 2012
Abstract 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 ows. The current fair value of goodwill is unveriable because it depends in part on managements future actions (including managers conceptualization and implementation of rm strategy). Agency theory predicts managers will, on average, use the unveriable discretion in SFAS 142 consistent with private incentives. We test these hypotheses in a sample of rms with market indications of goodwill impairment. Our evidence, while consistent with some agency-theory based predictions, does not conrm the private information hypothesis.
Keywords Agency theory Goodwill impairment Fair-value accounting
FASB SFAS 142
JEL Classication D82 G38 K22 M41 M43 M44 M46
1 Introduction
Accounting for acquired goodwill has been subject to considerable debate for at least the past 50 years: Zeff (2005) cites disagreements over goodwill accounting rules as among the causes for the collapse of both the Committee on Accounting
K. Ramanna (&)
Harvard Business School, Boston, MA, USA e-mail: [email protected]
R. L. Watts
MIT Sloan School of Management, Cambridge, MA, USA e-mail: [email protected]
Evidence on the use of unveriable estimates in required goodwill impairment
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750 K. Ramanna, R. L. Watts
Principles and the Accounting Principles Board. SFAS 142, issued by the FASB in 2001, introduced a new approach to goodwill accounting by abolishing goodwill amortization and requiring all goodwill be tested periodically for impairment using estimates of its current fair value. In issuing SFAS 142, the FASB (2001, p. 7) predicted that the standard will improve nancial reporting because the nancial statements of entities that acquire goodwill and other intangible assets will [now] better reect the underlying economics of those assets. Specically, the FASB expected nancial statements generated under the standard to provide users with a better understanding of the expectations about and changes in [goodwill and other intangible assets] over time. That is, the board expected that managers would, on average, use estimates of goodwills fair value to convey private information on future cash ows.
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