Is SFAS 142 A Good Opportunity For Firms To Manage Earnings?
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SFAS 142 eliminates the goodwill amortization and replaces it with an annual impairment test. This new accounting rule also provides the guidelines for firms to report their transition goodwill write-offs through a one-time below-the-line special item. After the one year transition period, any goodwill write-offs would be reported as operating expenses. This study analyzes the goodwill reporting behaviors in firms with in-process research and development (IPR&D firms) and examines whether IPR&D restated firms take advantage of this one-time below-the-line earnings management opportunity during the SFAS 142 transition period. In addition, this study examines the association between IPR&D firms' transition goodwill write-offs and the quality of firms' corporate governance. This study provides evidence to support that IPR&D restated firms are more likely to take transition goodwill write-offs and take greater amounts of transition goodwill write-offs in the SFAS 142 transition period, compared to IPR&D non-restated firms. However, the reporting strategies of IPR&D restated firms with greater restatement amounts in the late 1990s become conservative when these firms transition to SFAS 142. Furthermore, IPR&D firms' transition goodwill write-offs are constrained by the degree of board independence among their governance factors.