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Has goodwill accounting gone bad?

Author

Listed:
  • Kevin K. Li

    (University of California, Riverside)

  • Richard G. Sloan

    (University of California, Berkeley)

Abstract

Prior to SFAS 142, goodwill was subject to periodic amortization and a recoverability-based impairment test. SFAS 142 eliminates periodic amortization and imposes a fair-value-based impairment test. We examine the impact of this standard on the accounting for and valuation of goodwill. Our results indicate that the new standard has resulted in relatively inflated goodwill balances and untimely impairments. We also find that investors do not appear to fully anticipate the untimely nature of post-SFAS 142 goodwill impairments. Overall, our results suggest that, in practice, some managers have exploited the discretion afforded by SFAS 142 to delay goodwill impairments, thus temporarily inflating earnings and stock prices.

Suggested Citation

  • Kevin K. Li & Richard G. Sloan, 2017. "Has goodwill accounting gone bad?," Review of Accounting Studies, Springer, vol. 22(2), pages 964-1003, June.
    • Handle: RePEc:spr:reaccs:v:22:y:2017:i:2:d:10.1007_s11142-017-9401-7
    DOI: 10.1007/s11142-017-9401-7
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    References listed on IDEAS

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