The Optional Qualitative Assessment in Impairment Tests

Step Zero: Determinants and Implications of Reliance on the Qualitative Goodwill Impairment Assessment

“…Overall, I find that better performing firms are more likely to rely on a qualitative assessment and that reliance on a qualitative assessment is negatively associated with large future goodwill impairments over the subsequent four years. This result differs from two concurrent studies that find some evidence of a positive association between the incidence of goodwill impairments and usage of the qualitative assessment (Black, Krupa, and Minutti-Meza 2019;Giedt, Moon, and Wang 2018) which I discuss in detail in Appendix E. I also find that goodwill is more value-relevant on average for firms that rely on a qualitative assessment versus a quantitative test. These findings suggest that, on average, managers are not using the discretion inherent in ASU 2011-08 opportunistically.…”

“…However, this study does not identify firm-specific choices to rely on a qualitative versus a quantitative test. Black et al (2019) find evidence suggesting that "firms performing a qualitative assessment have an incrementally higher likelihood of goodwill impairments compared to firms silent about the qualitative assessment in the post-adoption period." Their measurement of key variables, including the classification of "performing" firms, differs substantially from mine.…”

“…These findings suggest that managers' private incentives drive them to delay recognizing goodwill impairments, consistent with the agency explanation. contemporaneous studies (Giedt et al 2018;Black et al 2019). 7 However, the discretion provided by ASU 2011-08 is likely much more limited than the discretion inherent in SFAS 142; thus, it is unclear ex-ante whether, on average, managers use the qualitative assessment consistent with the private information theory or agency theory.…”

“…This aligns with the optimal caliper width recommended by Austin (2010 Finally, the research designs for the goodwill impairment analyses in these two studies differ from mine. Both Black et al (2019) and Giedt et al (2018) conduct a "pre-post" analysis to test for an association between the incidence of goodwill impairments and the enactment of ASU 2011-08 (see Columns 1-2 in Tables 4 and 5 of Black et al and Table 5 in Giedt et al). These designs raise a few concerns.…”

“…42 For example, within my sample, 66 firms chose to rely on the qualitative assessment in 2011 compared to 106 firms in 2012. effectively holds constant a firm's impairment testing method across the sample period. 43 The fact that QUAL is measured at the firm level while the goodwill impairment indicator (GW_WD) is measured at the firm-year level makes it difficult to interpret the results of their analysis of the effect of the qualitative assessment on the frequency of goodwill impairment (i.e., Tables 4 and 5 in Black et al 2019). Based on their definition of QUAL, it is possible that the performance of the qualitative assessment could actually occur after the year in which the goodwill impairment is measured (e.g., if the firm recognized a goodwill impairment in 2013 but did not perform a qualitative assessment until 2015).…”