The paper aims to analyze the reasons for the unremarkable increase in value relevance of new impairment testing of goodwill following the introduction of new accounting standards SFAS 141 and 142.
After surveying main research about market reactions to announcements of goodwill write‐off before and after the introduction of the new SFAS the paper shows why the two‐step procedure of impairment testing risks undermining the very economic substance of the test.
The analysis shows the inadequacy of the impairment test to measure the destruction of wealth experienced by acquiring firms’ shareholders and to supply value‐relevant information owing to the lack of disclosure of information after the first stage of the test. It also shows the consequences of management's discretionary power in setting forth projections.
The paper lays the groundwork for interpreting the empirical evidence on the limited information content of goodwill write‐offs.
