SFAS 142 requires managers to use estimates of their firms‘ discounted future values to determine goodwill write-offs. Such estimates are different from the discretion historically afforded in financial reporting in that they are ex post unverifiable. For example, under the standard, a manager of a single reporting-unit firm can avoid a goodwill write-off despite market indications to the contrary by generating a hypothetical firm value that exceeds the firm‘s liquid market value. Ex post, if the firm value used to justify non-impairment is not realized, the manager can claim it was due to factors outside her control (e.g., macroeconomic conditions). It is difficult to verify or falsify such a claim in a court of law (the claim cannot be objectively characterized as true or false, Ollman v. Evans, 750 F.2d 970, D.C. Cir., 1984). By promulgating SFAS 142, standard setters must implicitly assume that managers will, on average, use unverifiable discretion to convey private information on future cash flows. In contrast, agency theory predicts managers will, on average, use unverifiable discretion opportunistically. We test these alternate predictions in the paper.

We investigate managers‘ implementation of the goodwill impairment test in SFAS 142 in a sample of firms with market indications of goodwill impairment. We examine whether the goodwill non-impairment is associated with managers‘ private information on future cash flows (as standard setters likely expect) and/or with agency based motives. We do not find evidence to confirm the private information argument, but we do find evidence consistent with the agency argument.