Discretionary Disclosures of Goodwill Slack: Determinants and Consequences
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2015
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Jenkins, NT; Pevzner, M; Zhang, S. (2015). Discretionary Disclosures of Goodwill Slack: Determinants and Consequences. Conference on Convergence of Financial and Managerial Accounting, At Banff, Canada.
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Abstract
Recently, the SEC has added a principle-based requirement to the disclosures for goodwill. The rule requires firms to report the percentage by which the fair value of reporting units exceed their book values—slack—when the fair value is not substantially in excess of book value. The SEC does not place a bright-line on what is meant by substantially in excess. We examine the determinants and consequences of this disclosure requirement and find evidence consistent with the SEC's perceived goal—improve goodwill balances are more likely to disclose slack. Firms that provide the disclosure are 64% more likely to experience an impairment next period. Moreover, information asymmetry declines following a slack disclosure. These results suggest that slack disclosure has led to an increase in the quality of information available to investors regarding future impairment of goodwill.