Does Financial Reporting for Income Tax Expense Affect the Timeliness of Goodwill Impairments?

50 Pages Posted: 27 Sep 2019 Last revised: 13 Jul 2020

See all articles by Zach King

Zach King

University of Wisconsin-Madison

Dan Lynch

University of Wisconsin - Madison - Department of Accounting and Information Systems

Bridget Stomberg

Indiana University - Kelley School of Business

Steven Utke

University of Connecticut - Department of Accounting

Date Written: July 10, 2020

Abstract

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

King, Zachary and Lynch, Dan and Stomberg, Bridget and Utke, Steven, Does Financial Reporting for Income Tax Expense Affect the Timeliness of Goodwill Impairments? (July 10, 2020). Available at SSRN: https://ssrn.com/abstract=3455659 or http://dx.doi.org/10.2139/ssrn.3455659

Zachary King (Contact Author)

University of Wisconsin-Madison ( email )

Madison, WI
United States

HOME PAGE: http://wsb.wisc.edu/directory/students/phd/students/zachary-king

Dan Lynch

University of Wisconsin - Madison - Department of Accounting and Information Systems ( email )

School of Business
975 University Avenue
Madison, WI 53706
United States

Bridget Stomberg

Indiana University - Kelley School of Business ( email )

1309 East Tenth Street
Indianapolis, IN 47405-1701
United States

Steven Utke

University of Connecticut - Department of Accounting ( email )

School of Business
Storrs, CT 06269-2041
United States

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