Does Financial Reporting for Income Tax Expense Affect the Timeliness of Goodwill Impairments?

ABSTRACT We examine if financial reporting for income tax expense affects the timeliness of goodwill impairments. Goodwill impairments are material, but their timing is subject to managers’ discretion. U.S. GAAP requires firms to test all goodwill for impairment, whereas tax laws generally do not permit impairment deductions and allow amortization for only some goodwill. When an impairment includes goodwill that is not tax-amortizable, firms obtain no financial statement tax benefits to offset the impairment’s negative effect on GAAP net income, thereby increasing the effective tax rate (ETR). We predict and find that managers are more likely to delay impairments when the impairment of nontax-amortizable goodwill generates a material ETR increase. We estimate that goodwill impairments are 11 to 14 percent more likely to be delayed when they materially increase ETRs. Our findings suggest financial reporting for taxes potentially distorts the timeliness of goodwill impairments, informing the debate on goodwill accounting. Data Availability: Data are available from public sources cited in the text. JEL Classifications: G34; K34; M41.