Goodwill Impairment: A Comparative Country Analysis

ABSTRACTIn response to de jure versus de facto issues about the convergence of accounting standards, we investigate whether non-U.S. firms (which list their shares on U.S. secondary markets and report under U.S. standards) are more likely to interpret and apply the accounting rules in a different manner than their U.S. counterparts. Specifically, this study evaluates a mediation effect: i.e., that non-U.S. firms will take greater goodwill impairment charges under SFAS 142 (ASC 350) than U.S. firms. The findings indicate that firm-level and country-level characteristics including legal, accounting, and cultural values affect the goodwill impairment decision and impact the comparability of accounting information.(ProQuest: ... denotes formulae omitted.)INTRODUCTIONOn November 7, 2007, the U.S. Financial Accounting Standards Board (FASB) replied, as follows, to the Securities and Exchange Commission inquiry: "Investors would be better served if all U.S. public companies used accounting standards promulgated by a single global standard setter as the basis for preparing their financial reports. This would be best accomplished by moving U.S. public companies to an improved version of International Financial Reporting Standards (IFRS)." The FASB promotes de jure harmonization (harmonized rules). However, the FASB, unlike Ball (2006), does not emphasize tensions between de jure (rules) and defacto (practices) harmonization. Rather, the FASB reports that historical differences, which provoked variations in practice, are disappearing and maintains that a principles-based system is preferable to an apparently rules-based system. Despite the FASB' s confidence in the demise of historical differences, whether such differences exist remains an empirical question (Brunovs & Kirsch, 1991; Chen, Sun, & Wang, 2002; d'Arcy, 2006; Lang, Raedy, Yetman, & Joos, 2003; Tsakumis 2007). In addition, the FASB's belief that a rules-based global system improves the "usefulness and comparability of reported financial information" prompts a second empirical question: whether or not rules enhance comparability. Schipper (2003), for example, argues that U.S. GAAP is principles-based with implementation guidelines in the form of rules and that rules enhance comparability.In this study, we are guided by the FASB's emphasis upon the "usefulness and comparability of reported financial information" and suggest that comparability is an overarching goal focusing debate about harmonization and the desirability of principles-based standards. As Schipper explains, SFAS 141 and 142 are based upon the concepts of comparability and relevance (2003, p. 64). Further, she says, SFAS 141 and 142 are principlesbased, but points out that application of the standards requires guidelines (i.e., rules) (2003, p. 65). Influenced by the FASB's and S chipper' s emphasis upon comparability, we investigate whether historical differences, which provoke variations in practice, are disappearing and whether non-U. S . firms (which list their shares on U.S. secondary markets and report under U.S. standards) are more likely to interpret and apply the accounting rules in a manner that lowers reported earnings as compared to their U.S. counterparts. Specifically, this study evaluates the likelihood that non-U.S. firms will take greater goodwill impairment charges under SFAS 142 than U.S. firms. The use of cross-listed firm data provides a useful platform to compare country effects while controlling for similar GAAP data input. In other words, we are able to examine country-level differences in the application of impairment standards in order to determine if de jure harmonization enhances comparability.Prior research (e.g., Lang, et al., 2003) compares cross-listed firms in the U.S. with foreign firms of the same country that are not cross listed and documents that the cross- listed firms tend to have more conservative accounting. Other studies have compared cross-listed firms in countries mandating IASB IFRS to non-cross listed firms of non-US countries adopting IFRS subject to modification; such studies have inconclusive findings. …