Using Goodwill Impairment To Effect Earnings Management During SFAS No. 142s Year Of Adoption And Later

Prior research (Bens and Heltzer, 2004) shows that the market penalizes firms less for reporting goodwill write-downs below-the-line than it does for presenting them above-the-line. Only in 2002, the year SFAS No. 142 became effective, did goodwill impairments enjoy below-the-line treatment. The current research provides evidence that firms “cherry picked” this year to recognize large impairment losses, thus removing much of the burden from future years when these losses otherwise would have been reported above-the-line. The study also indicates that, even though the number of firms taking goodwill write-offs declined subsequent to 2002, those entities that did so seemed to be taking these discretionary hits because earnings were already depressed in the current year. As such, the big bath earnings management observed in the year of adoption in previous studies (Jordan and Clark, 2004 and 2005) appears to continue even though these impairment losses no longer receive favorable below-the-line treatment.

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Big Bath Earnings Management: The Case Of Goodwill Impairment Under SFAS No. 142

Journal of Applied Business Research (JABR) ◽

10.19030/jabr.v20i2.2206 ◽

2011 ◽

Vol 20 (2) ◽

Cited By ~ 8

Author(s):

Charles E. Jordan ◽

Stanley J. Clark

Keyword(s):

Earnings Management ◽

Compelling Evidence ◽

Font Size ◽

Goodwill Impairment ◽

Current Period ◽

Fortune 100 ◽

Big Bath

The big bath theory of earnings management suggests that firms experiencing low earnings in a given year may take discretionary write downs to reduce even further the current period’s earnings.  The notion is that the company and its management will not be punished proportionately more for the big hit it takes to its already depressed earnings.  This “clearing of the decks” makes it easier to generate higher profits in later years.  SFAS No. 142, with its new requirement to test goodwill annually for impairment, provided a unique opportunity to test this big bath theory.  Examining Fortune 100 companies, this study presents compelling evidence that the big bath theory is more than just a theory but is instead a practiced method of managing earnings.

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CEO Turnover, Earnings Management, and Big Bath

SSRN Electronic Journal ◽

10.2139/ssrn.2165123 ◽

2012 ◽

Cited By ~ 1

Author(s):

Chia-Feng Yu

Keyword(s):

Earnings Management ◽

Ceo Turnover ◽

Big Bath

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Do Canadian Companies Employ Big Bath Accounting When Recording Goodwill Impairment?

International Journal of Economics and Finance ◽

10.5539/ijef.v7n9p159 ◽

2015 ◽

Vol 7 (9) ◽

Cited By ~ 2

Author(s):

Charles E. Jordan ◽

Stanley J. Clark

Keyword(s):

Goodwill Impairment ◽

Big Bath

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Earnings management and goodwill impairment

Journal of Intellectual Capital ◽

10.1108/jic-09-2015-0081 ◽

2016 ◽

Vol 17 (1) ◽

pp. 120-147 ◽

Cited By ~ 5

Author(s):

Giuseppe Davide Caruso ◽

Elisa Rita Ferrari ◽

Vincenzo Pisano

Keyword(s):

Earnings Management ◽

Design Methodology ◽

Income Smoothing ◽

Financial Accounting ◽

Current Debate ◽

Managerial Behavior ◽

Content Type ◽

Listed Firms ◽

Goodwill Impairment ◽

Research Questions

Purpose – The purpose of this paper is to understand whether managerial behavior in impairing goodwill arising from M & As has changed after the adoption of IAS/IFRS, searching for evidences of earnings management (EM) practices. Thus, our goal is to provide a response to the following research questions. Are goodwill impairments used by listed firms’ managers to manipulate earnings? If so, what kind of EM practice is mostly used? Design/methodology/approach – In this paper the authors tested the following hypothesis: H1. In the year of the deal’s closure and in the following four years, the management detects impairment of goodwill in difformity with the previous Italian regulations and related accounting practices. Moreover, the authors tried to determine, for each considered firms, potential symptoms of typical DEM practices widely debated in the financial accounting literature (income smoothing, income minimization, income minimization, or big bath accounting). Findings – Our analysis does not prove evidence of certain EM practices, but it highlights very clearly that, after the adoption of IAS/IFRS, managers’ behavior has deeply changed. Moreover, the analysis shows that there is no univocal choice in favor of a specific EM practice and that every firm pursues its own “strategy.” Originality/value – Considering the importance of the topic from both the perspectives of managerial (with regard to M & As valuation processes) and financial accounting (with regard to intangibles valuation fulfilled by applying the impairment test instead of the amortization), this work aims to provide a multi-dimensional contribution to the current debate.

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Goodwill And Goodwill Write-Downs: Their Effects On Earnings Quality For 2008 And 2009

Journal of Business & Economics Research (JBER) ◽

10.19030/jber.v7i11.2351 ◽

2011 ◽

Vol 7 (11) ◽

Author(s):

Don E. Giacomino ◽

Michael D. Akers

Keyword(s):

Earnings Management ◽

Earnings Quality ◽

Pension Plan ◽

Expected Returns ◽

Balance Sheets ◽

Big Bath

This paper examines goodwill on corporate balance sheets. Specifically, the paper measures the extent to which goodwill exists on corporate balance sheets and the degree of goodwill write-downs that have occurred recently. We report on our study and a study by Intangible Business, which show that many firms carry substantial amounts of goodwill on their 2008 balance sheets. Thus, because of the recent downturn in the economy and the markets, the potential for big bath earnings management for 2008 and 2009 exists. In addition, because of reductions in expected returns on pension plan assets, many firms are likely to record much higher pension expenses. We expect that the combination of goodwill impairments and increased pension expense will have significant effects on both the amount and the quality of earnings for 2008 and, possibly, 2009.

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Goodwill Impairment: A New Window For Earnings Management?

Journal of Business & Economics Research (JBER) ◽

10.19030/jber.v8i2.669 ◽

2010 ◽

Vol 8 (2) ◽

Cited By ~ 1

Author(s):

Yousef Jahmani ◽

William A. Dowling ◽

Paul D. Torres

Keyword(s):

Earnings Management ◽

Balance Sheet ◽

Accounting Information ◽

Accounting Standards ◽

Financial Accounting ◽

Financial Accounting Standards Board ◽

Font Size ◽

Rates Of Return ◽

Public Companies ◽

Goodwill Impairment

The Financial Accounting Standards Board promulgated standard No. 142 in an attempt to improve the understandability of accounting information.  This new rule eliminated the practice of automatically amortizing goodwill.  No. 142 requires public companies to test goodwill for possible impairment at least annually.  An unintended consequence of this new standard is the opportunity for companies to use it in earnings management.  To test the possibility that the rule is being used for this purpose, a sample of companies was chosen, all of which had amounts of goodwill on their balance sheet during the 2003-2005 interval.  The results reveal that the number of companies experiencing losses or low rates of return on total assets who actually impaired goodwill was statistically insignificant during the period under consideration.  Thus, the results strongly suggest that companies are using No. 142 in an attempt to manage the volatility of earnings.

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Determinants of Goodwill Impairment Losses under IAS 36: The French Case

International Journal of Accounting and Financial Reporting ◽

10.5296/ijafr.v7i1.11291 ◽

2017 ◽

Vol 7 (1) ◽

pp. 343

Author(s):

Nour Malijebtou Hassine ◽

Faouzi Jilani

Keyword(s):

Financial Crisis ◽

Earnings Management ◽

Audit Quality ◽

Accounting Standard ◽

Managerial Opportunism ◽

Goodwill Impairment ◽

French Case ◽

The Impact ◽

Big Four

The present paper investigates the determinants of goodwill impairment losses under IAS 36. More specifically, this study examines the impact of earnings management, corporate governance and financial crisis on goodwill impairment losses reported by French firms following the adoption of IAS 36 on purchased goodwill. Based on a sample of 730 observations from 107 groups of companies that belong to the SBF 250 over the period 2006-2012, the findings of this research confirm largely our predictions. Indeed, main results show that managers impair goodwill to meet earnings management motives linked to CEO change, earnings smoothing, big bath accounting and financial crisis. Moreover, they reveal that French firms impair goodwill to response to debt renegotiation hypothesis. In addition, the findings demonstrate that French firms audited by a Big Four auditor record lower goodwill impairment losses. Thus, they highlight the role of audit quality to constrain managerial opportunism associated to goodwill impairment.This study illuminates the accounting standard-setters in understanding the determinants of goodwill impairment losses in France under IAS 36. Therefore, it contributes to the international actual debate on goodwill and to the international accounting literature.

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Accounting Standards, Goodwill Impairment and Earnings Management in Malaysia

International Journal of Economics and Finance ◽

10.5539/ijef.v6n12p201 ◽

2014 ◽

Vol 6 (12) ◽

Author(s):

Murad Abuaddous ◽

Mustafa Mohd Hanefah ◽

Nur Hidayah Laili

Keyword(s):

Earnings Management ◽

Accounting Standards ◽

Goodwill Impairment

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Goodwill impairment tests as a device for earnings management: Evidence from Germany

Corporate Ownership and Control ◽

10.22495/cocv18i1siart3 ◽

2020 ◽

Vol 18 (1, Special Issue) ◽

pp. 261-280

Author(s):

Benjamin Tobias Albersmann ◽

Christian Friedrich ◽

Daniela Hohenfels ◽

Reiner Quick

Keyword(s):

Earnings Management ◽

Accounting Standards ◽

International Accounting Standards ◽

Ongoing Debate ◽

Business Combinations ◽

Listed Firms ◽

Goodwill Impairment ◽

Management Incentives ◽

Accounting Changes ◽

Relevant Factors

This study investigates whether goodwill impairments are influenced by earnings management incentives. It is motivated by the International Accounting Standards Board’s (IASB) post-implementation review on business combinations, the ongoing debate on the reliability of impairment testing, and the high practical relevance of this topic. The sample consists of 2,127 firm-year observations from German listed firms for the periods 2006 to 2013. The results show that the likelihood to recognize goodwill impairments and the magnitude of impairment losses are not only determined by economic and other relevant factors but also influenced by earnings management incentives like beating an earnings target, conservative smoothing, big bath accounting, changes in senior management, and the firms’ general earnings management behavior. Hence, goodwill impairment tests seem to be used by management as a device for earnings management. The results do not change over time, i.e., between the period before, during, and after the financial crisis.

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Potential Big Bath Accounting Practice in CEO Changes (Study on Manufacturing Companies Listed in Indonesia Stock Exchange)

International Journal of Accounting and Finance Studies ◽

10.22158/ijafs.v1n2p202 ◽

2018 ◽

Vol 1 (2) ◽

pp. 202

Author(s):

Ahmad Riyadi ◽

Wiwik Utami ◽

Lucky Nugroho

Keyword(s):

Earnings Management ◽

Stock Exchange ◽

Listed Company ◽

Secondary Data ◽

Financial Statement ◽

Manufacturing Companies ◽

Purposive Sampling ◽

Accounting Practice ◽

Accounting Model ◽

Big Bath

This Research aims to compare the earnings management which is big bath accounting model while CEO Changes in Indonesia. This research is using Secondary data which is Financial Statement from the Indonesian Stock Exchange. CEO change is classified either as routine or non-routine based on RUPS (General Shareholders Meeting) and RUPSLB (Extraordinary General Shareholders Meeting) information.The purposive sampling was used in this research by sampling 14 listed company of CEO Change non-routine and 34 listed company of CEO Change routine. These samples are observed from 2004 to 2014. To identify the big bath accounting practice. Although CEO Change non-routine made a high correlation in this study, the study provides there is no difference in earnings management big bath accounting model while CEO Changes between routine and non-routine changes.

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