The Optional Qualitative Assessment in Impairment Tests
56 Pages Posted: 6 Feb 2019 Last revised: 4 Nov 2021
Date Written: October 28, 2021
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: Suggested Citation