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Review of Accounting Studies Vol. 17 No. 4 2012

Evidence on the use of unverifiable estimates in required goodwill impairment

Karthik Ramanna1,2; Ross L. Watts3

1 Harvard Business School, Boston, MA, USA · 2 Harvard Business School · 3 Massachusetts Institute of Technology

open access

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 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.

DOI
10.1007/s11142-012-9188-5
Volume
17
Issue
4
Pages
749-780
Language
en
Sources
semanticscholar openalex crossref

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