ABSTRACT
International and U.S. accounting standards mandate a one-step quantitative impairment test for goodwill and other indefinite-lived intangibles, but U.S. standards allow an optional qualitative assessment before the quantitative test. This option is intended to reduce the complexity and costs of the quantitative test. We demonstrate that U.S. firms using this option have comparatively higher valuations and face higher expected costs for conducting quantitative tests. Using a difference-in-differences research design, we show that firms using this option have a marginally higher incidence of impairments, suggesting that the qualitative assessment does not systematically allow companies to avoid write-downs. Moreover, we do not find clear evidence that using this option decreases the timeliness of impairments or increases monitoring costs for auditors, regulators, and investors. Our study provides evidence about the consequences of a revised impairment approach and speaks to the broader issue of allowing unconditional options and qualitative judgments in financial reporting.
Data Availability: Data are available from public sources identified in the text. Hand-collected data are available upon request.
JEL Classifications: M41; M42; M48.
