Informativeness of Discretionary Disclosures of Goodwill Slack

44 Pages Posted: 21 Jul 2015 Last revised: 1 Oct 2016

See all articles by Nicole Thorne Jenkins

Nicole Thorne Jenkins

University of Virginia - McIntire School of Commerce

Mikhail Pevzner

University of Baltimore - Merrick School of Business

Suning Zhang

Iowa State University - Debbie and Jerry Ivy College of Business

Date Written: October 2016

Abstract

Recently, the SEC’s Division of Corporation Finance (CorpFin) has added an additional guidance to its Financial Reporting Manual (FRM) with respect to the disclosure for goodwill. For firms at a risk of failing the step one of goodwill impairment test, this guidance recommends that firms consider reporting the percentage by which the fair value exceeds carrying values of the reporting unit — slack — when the fair value is not substantially in excess of carrying value. This CorpFin guidance does not specifically identify what is meant by substantially in excess. We examine the consequences of this disclosure guidance and find evidence consistent with the FRM’s perceived goal: investors and analysts seem to be able to better predict future goodwill impairments for firms disclosing lower slack levels. These results suggest that information conveyed through slack disclosures has led to an increase in the quality of information available to investors regarding future impairment of goodwill.

Keywords: goodwill, impairment, disclosure

JEL Classification: G19, D89, M40

Suggested Citation

Jenkins, Nicole Thorne and Pevzner, Mikhail and Zhang, Suning, Informativeness of Discretionary Disclosures of Goodwill Slack (October 2016). Available at SSRN: https://ssrn.com/abstract=2633635 or http://dx.doi.org/10.2139/ssrn.2633635

Nicole Thorne Jenkins (Contact Author)

University of Virginia - McIntire School of Commerce ( email )

P.O. Box 400173
Charlottesville, VA 22904-4173
United States

HOME PAGE: http://https://www.commerce.virginia.edu/faculty/nt4jw

Mikhail Pevzner

University of Baltimore - Merrick School of Business ( email )

1420 N. Charles St.
Baltimore, MD 21201-5779
United States

Suning Zhang

Iowa State University - Debbie and Jerry Ivy College of Business ( email )

613 Wallace Road
Ames, IA 50011-2063
United States

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