Is SFAS 142 A Good Opportunity For Firms To Manage Earnings?

Abstract

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.