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List of abbreviations ....................................................................... XX
List of symbols ..............................................................................II
List of figures ............................................................................ XXV
List of tables .............................................................................XXVI
1 Introduction ........................................................................... 1
1.1 Problem .................................................................... 1
1.2 Research question and contribution ...................................................4
1.3 Outline .......... ..... ...........................................................6
2 The goodwill debate ................................................................ 9
2.1 Chapter overview ................................................................... 9
2.2 The concept ofgoodwill ..............................................................10
2.3 Main issues .........................................................................15
2.3.1 Pooling and purchase methods illustrated ............... ...................... 15
2.3.2 Argum ents raised in the discussion ........................................... 17
2.3.2.1 Conceptual issues ............................................................18
2.3.2.2 Status quo of accounting rules ... ...........................................20
2.3.2.2.1 United States ............................................................20
2.3.2.2.2 International Accounting Standards ...................................... 23
2.3.2.2.3 Germany ................................................................. 24
2.3.2.3 Practical issues ............................................................ 26
2.3.3 Theoretical analysis of arguments raised .............................. ....... 27
2.4 Empirical evidence relevant to the goodwill debate ................................ 31
2.4.1 Overview ............................................................ 31
2.4.2 Research questions .............................................................33
2.4.3 Direct evidence ................................................................34
2.4.3.1 Survey evidence ............................................................ 35
2.4.3.2 Determinants of goodwill write-offs ........................................ 36
2.4.3.3 Determinants of other goodwill-related financial reporting decisions........ 38
2.4.3.3.1 Influence of goodwill accounting rules on acquisition premiums........... 39
2.4.3.3.2 Determinants of purchase price allocation decisions ..................... 41
2.4.3.3.3 Determinants of amortization parameters ................................. 44
2.4.3.4 Determinants of the purchase/pooling choice ................................. 45
2.4.3.4.1 Factors influencing the purchase/pooling choice ........................ . 45
2.4.3.4.2 Managers' willingness to "purchase" the pooling method.................... 49
2.4.3.5 Managers' lobbying for goodwill-related accounting rules ................... 54
2.4.4 Indirect evidence .......................................................... 55
2.4.4.1 Experimental evidence ......... ........................................... 56
2.4.4.2 Information content of goodwill write-offs .................................. 57
2.4.4.3 Value relevance of goodwill book value and amortization ..................... 59
2.4.4.3.1 Balance sheet approach ... ..... .................................... 60
2.4.4.3.2 Combined balance sheet and income statement approaches ................... 61
2.4.4.3.3 Income statement approach ........................ ..................... 66
2.4.4.3.4 International comparison studies ......................................... 67
2.4.4.4 Market reactions to the purchase/pooling decision ........................... 68
2.4.4.5 Market reactions to mandated changes in accounting rules for
business com binations ................................................. 73
2.5 Summary and implications ................ .... .....................................74
3 Empirical research on discretionary asset write-offs ................................... 79
3.1 Chapter overview ................................................................... 79
3.2 Discretionary asset write-offs as a subject of accounting research ................. 80
3.3 Determinants ofwrite-off behavior .................................................. 85
3.3.1 Earnings management as an explanatory factor ..... .......................... 85
3.3.1.1 Earnings management defined ................................................ 85
3.3.1.2 Overview of the earnings management literature .............................. 89
3.3.1.3 Discretionary asset write-offs and earnings management ...................... 91
3.3.2 Theory, hypotheses, and main findings ......................................... 92
3.3.2.1 Overview ................ ....................................................92
3.3.2.2 Economic factors ....................... .... ............................ 94
3.3.2.3 Economic-consequences incentives ........................................... 99
3.3.2.3.1 Intellectual roots: Positive accounting theory ......................... 100
3.3.2.3.2 Application to financial reporting decisions ........................... 102
3.3.2.3.3 Accounting earnings-based compensation schemes.......................... 105
3.3.2.3.4 Accounting-based debt covenants in lending agreements .................. 110
3.3.2.3.5 Political costs .................................... .................. 114
3.3.2.3.6 Discriminating between competing hypotheses ............................ 119
3.3.2.4 Capital market-related incentives .............. ......... .................. 123
3.3.2.4.1 Theoretical fundamentals ............................................ 123
3.3.2.4.2 Management's interest in the firm's stock price ..................... 127
3.3.2.4.3 Maximizing earnings ................................................. 128
3.3.2.4.4 Income smoothing ........................................ ........... 129
3.3.2.4.5 Target accounting ................................................... 132
3.3.2.4.5.1 Prevalence of target accounting ............................... 133
3.3.2.4.5.2 Importance of earnings targets ................................ 136
3.3.2.4.5.3 Cross-sectional differences in target-accounting behavior...... 137
3.3.2.4.5.4 Market reactions to target accounting ....................... 137
3.3.2.4.6 Big bath ........,.................................................. 138
3.3.2.4.7 Rating ........................................................... 141
3.3.2.4.8 Specific considerations regarding accounting changes and
other transitory earnings components .................................... 144
3.3.2.5 Factors restricting management discretion............................... 147
3.4 Financial statement users' view of discretionary asset write-offs ................. 150
3.4.1 Information perspective of financial reporting ............................ 151
3.4.2 Research approaches ................................. 152
3.4.3 Main findings ................................................................. 154
3.4.3.1 Information content studies ........................................... 154
3.4.3.2 Association studies .................................................. 157
3.5 Summary and implications ......................................................... 159
4 Discretionary properties of the impairment-only approach .............................. 163
4.1 Chapter overview .................................................................. 163
4.2 Main provisions of SFAS 141 and 142 ............................................... 165
4.3 Frequency ............................ ........................................... 167
4.3.1 Annual testing ............. ..................................... 167
4.3.1.1 Rule.................................................................. 167
4.3.1.2 Exception ............................................................. 168
4.3.2 Unscheduled testing when circumstances warrant .......................... 170
4. 4 Level of aggregation ........................................ ................ 173
4. 5 Existence ........................................................................ 176
4.5.1 Reporting unit fair value .............................................. 177
4.5.1.1 Quoted market prices .................................................. 178
4.5.1.2 Present value techniques ................................................... 179
4.5.1.2.1 Measuring fair value as the objective ............................. 179
4.5.1.2.2 Measurement techniques ............................................ 181
4.5.1.3 Multiples .................................................................. 183
4.5.1.4 Preliminary conclusion ....................................... .. ...... 185
4.5.2 Carrying value of reporting unit net assets ................................... 186
4.5.2.1 Allocating assets and liabilities ............................. ............ 186
4.5.2.2 Allocating goodwill .................................................... 188
4.5.3 Disposal ............................ ....................... ......... 191
4.6 Measurement .................. ......... ..................................... 192
4.6.1 Fair value of reporting unit net assets ....................................... 192
4.6.1.1 Fictitious purchase price allocation ...................................... 192
4.6.1.2 Recognition .................. ......... ................................... 193
4.6.1.3 Measurement .................. ........................................... 196
4.6.2 Inclusion of estimates ......... ............................ ....... ........ 196
4.7 Transition ............. ................................ ...................... 197
4.7.1 Effective date and initial application ................................... ... 197
4.7.2 Transitional impairment test ................................................. 198
4.7.3 Transitional presentation and disclosures .......................... 200
4.7.4 Reclassification of goodwill and intangible assets ........................... 201
4.8 Intermediate results ............. .............................................. 202
5 Empirical investigation of write-off determinants ..................................... 205
5.1 Chapter overview ...................................................................205
5.2 Hypothesis development ...... ........................................... 205
5.2.1 Overview ............................................... ............... 205
5.2.2 Economic factors ............................................ .................207
5.2.3 Financial reporting incentives ............................................... 209
5.2.3.1 Economic-consequences incentives ....................................... ....210
5.2.3.1.1 Compensation ................................................... ..210
5.2.3.1.2 Debt covenants .............................................. .....211
5.2.3.1.3 Political costs................................................. 214
5.2.3.2 Capital market-related incentives .................................... .....215
5.2.3.2.1 Target accounting ...................................... ......... 215
5.2.3.2.1.1 General decision model ..................... .......... ..... 215
5.2.3.2.1.2 Firms exceeding earnings targets ............................... 218
5.2.3.2.1.3 Firms falling short of earnings targets ......................... 218
5.2.3.2.2 Rating ...............................................................220
5.2.4 Control variables ..............................................................221
5.3 Research design and descriptive information ........................................ 223
5.3.1 Variable definition ........................................................ 223
5.3.2 Sample selection .... ..... ... ......... .................................. 230
5.3.3 Descriptive statistics and comparative analyses ............................... 232
5.4 Regression analysis .......................................................... ... 243
5.4.1 Methods employed in studies of write-off determinants ......................... 243
5.4.1.1 Qualitative dependent variables: The write-off decision ..................... 244
5.4.1.2 Limited dependent variables: The write-off amount ........................... 245
5.4.2 Summary of hypotheses ......................................................... 249
5.4.3 Analysis of the write-off decision ........................................... 250
5.4.3.1 Full-sample test ............. ........................................... 250
5.4.3.2 Tests for robustness ....... .... ................. .. ..................... 254
5.4.3.3 Sub-sample tests ................................................. 254
5.4.4 Analysis of the write-off amount ............. ........................... 258
5.4.4.1 Full-sample test ............................................................ 259
5.4.4.2 Tests for robustness .............................. ..... ................ 260
5.4.4.3 Sub-sample tests ............. ............................................. 261
5.5 Inferences ........................................................................ 264
5.5.1 Summary of findings ............................................................264
5.5.2 Limitations ................................................................... 266
6 Conclusion ............................................................................. 269
Appendix ......... ...... .............................................................273
List of references ........................................................................ 283
List of accounting pronouncements and legal provisions ..................................... 321
Library of Congress Subject Headings for this publication: Goodwill (Commerce) Accountiung, Write-offs, Goodwill (Commerce) United States Accounting