The Optional Qualitative Assessment in Impairment Tests

56 Pages Posted: 6 Feb 2019 Last revised: 4 Nov 2021

See all articles by Dirk E. Black

Dirk E. Black

University of Nebraska at Lincoln - School of Accountancy

Jake Krupa

Tulane University - A.B. Freeman School of Business

Miguel Minutti-Meza

University of Miami - Department of Accounting

Date Written: October 28, 2021

Abstract

Current international and U.S. accounting standards mandate a one-step quantitative impairment test for goodwill and other indefinite-lived intangibles, but U.S. standards allow firms to perform a qualitative assessment before the quantitative test. The qualitative assessment, called “Step 0”, is intended to reduce the complexity and costs of the quantitative test in cases where the probability of impairment is low. This assessment is unique because it grants firms an unconditional option and depends on subjective qualitative judgment. We demonstrate that U.S. firms using this option have comparatively higher valuations and face higher expected costs for conducting quantitative tests. Next, using a difference-in-differences research design, we show that firms using this option have a marginally higher incidence of impairments, suggesting that the qualitative assessment does not systematically allow companies to avoid write-downs. Moreover, we do not find consistent evidence that using this option decreases the timeliness of impairments or increases monitoring costs for auditors, regulators, and investors. Our study provides evidence about the consequences of a revised impairment approach and speaks to the broader issue of allowing unconditional options and qualitative judgments in financial reporting.

Keywords: Goodwill; intangibles; impairment; qualitative assessment; ASC 350; SFAS 142; ASU 2011-08

JEL Classification: M41, M42, M48

Suggested Citation

Black, Dirk E. and Krupa, Jake and Minutti-Meza, Miguel, The Optional Qualitative Assessment in Impairment Tests (October 28, 2021). University of Miami Business School Research Paper No. 3322166, Available at SSRN: https://ssrn.com/abstract=3322166 or http://dx.doi.org/10.2139/ssrn.3322166

Dirk E. Black (Contact Author)

University of Nebraska at Lincoln - School of Accountancy ( email )

307 College of Business Administration
Lincoln, NE 68588-0488
United States

Jake Krupa

Tulane University - A.B. Freeman School of Business ( email )

7 McAlister Drive
New Orleans, LA 70118
United States

HOME PAGE: http://freeman.tulane.edu/faculty-research/accounting/jake-krupa

Miguel Minutti-Meza

University of Miami - Department of Accounting ( email )

Coral Gables, FL 33146-6531
United States
305-284-6287 (Phone)

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