Review of Quantitative Finance and Accounting, 23: 99–121, 2004
2004 Kluwer Academic Publishers. Manufactured in The Netherlands.
The Amount and Timing of Goodwill Write-Offs and
Revaluations: Evidence from U.S. and U.K. Firms
STEVEN L. HENNING
WAYNE H. SHAW
Edwin L. Cox School of Business, Southern Methodist University, PO Box 75033, Dallas, Texas 75275-0333, USA
College of Business, 526 Copeland Hall, Ohio University, Athens, OH 45701-2979, USA
Abstract. This paper investigates criticisms that U.S. GAAP had given ﬁrms too much discretion in determining
the amount and timing of goodwill write-offs. Using 1,576 U.S. and 563 U.K. acquisitions, we ﬁnd little evidence
that U.S. ﬁrms managed the amount of goodwill write-off or that U.K. ﬁrms managed the amount of revaluations
(write-ups of intangible assets). However, our results are consistent with U.S. ﬁrms delaying goodwill write-
offs and U.K. ﬁrms timing revaluations strategically to avoid shareholder approval linked to certain ﬁnancial
Keywords: goodwill, impairments, intangible assets, managerial incentives
JEL Classiﬁcation: G14, G34, G38, M14
Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intan-
gible Assets, eliminates the amortization of goodwill acquired in business combinations,
while providing a two-step test that requires the impairment of goodwill when the carrying
amount of a reporting unit exceeds its fair value.
These changes are intended to address
two criticisms of the pre-SFAS No. 142 accounting rules—the measurement and timing of
goodwill write-offs. We investigate both of these criticisms in this paper.
The ﬁrst criticism of pre-SFAS No. 142 accounting rules is that the rules provided too
much ﬂexibility in measurement of an impairment of goodwill, giving ﬁrms too much
discretion as to the amount of the write-off. SFAS No. 142 limits discretion by requiring
afair value approach to goodwill impairment using either market values or discounted
cash ﬂows. To examine this change, we compare pre-SFAS No. 142 write-offs to write-offs
predicted by market and earnings-based approaches suggested in SFAS No. 142.
A second criticism of pre-SFAS No. 142 impairment testing rules is that an absence
of a speciﬁc impairment “trigger” gave ﬁrms too much discretion in timing the write-off.
Previous accounting rules did not require regular testing and focused the test at the ﬁrm-
wide level. The ability to defer an impairment charge likely diminishes under SFAS No.
142 because it requires annual testing, including the adoption year, and because ﬁrms must
execute the for each reporting unit (i.e., one level below the segment level) instead of for the