Step Zero: Determinants and Implications of Reliance on the Qualitative Goodwill Impairment Assessment

Abstract

I examine the use of qualitative versus quantitative impairment testing methods and their differential implications for future impairments and goodwill valuation. Using hand-collected data, I find that the likelihood of reliance on a qualitative assessment is decreasing in both the complexity of goodwill and the risk of an underlying goodwill impairment. I also find that the likelihood of large future goodwill impairments is lower on average for firm-years in which the firm relies on a qualitative assessment. Finally, I investigate investor perceptions of this choice and find evidence that investors place a premium on goodwill when firms rely on a qualitative assessment versus a quantitative test. This finding suggests that investors perceive a firm’s goodwill impairment testing method choice as reflective of management’s private information. Overall, results suggest that managers are not using the discretion in ASU 2011-08 opportunistically, which was a concern in implementing this new standard.