Does Financial Reporting for Income Tax Expense Affect the Timeliness of Goodwill Impairments?
50 Pages Posted: 27 Sep 2019 Last revised: 13 Jul 2020
Date Written: July 10, 2020
This study examines if financial reporting for income tax expense affects the timeliness of goodwill impairments. Goodwill impairments are an important signal of expected future cash flows, yet their timing is subject to managers’ discretion. U.S. GAAP requires that firms test all goodwill for impairment, but tax laws allow recognition and amortization of only some types of goodwill. Thus, financial statement tax benefits partially offset the impairment’s negative effect on GAAP net income only when the impairment includes tax-amortizable goodwill. Holding the size of impaired goodwill constant, we predict managers are more likely to delay impairments when the offsetting financial statement tax benefits are smaller. Results are consistent with expectations across a battery of tests. We estimate goodwill impairments are 17 to 22 percent more likely to be delayed when firms recognize reduced financial reporting income tax benefits. Our findings suggest financial reporting for taxes potentially distorts the timeliness of goodwill impairments.
Keywords: Mergers and Acquisitions, Goodwill, Tax, Impairment, Intangible, Earnings Quality
JEL Classification: G34, K34, M41
Suggested Citation: Suggested Citation