Good will non-impairment describes the absence of goodwill impairment losses when they are expected. While a new enactment was instituted to govern goodwill amortization, experts were worried that companies would use this opportunity to manipulate their earnings. With the formulation of three working papers, the presence of good will non-impairment and the use of standards to control earnings by companies were realised. Goodwill becomes impaired if the value of the organisation’s goodwill assets worth decreases (Chambers et al. 38). A Company with an impaired goodwill may choose not to present any value or report a lesser value of goodwill impairment using accounting discretion. The FASB Formulated standards that enforced the accounting of acquired assets using purchase method. Here, the difference between net acquired assets and the fair value is evaluated. Research shows that goodwill non-impairment is in existent and that companies use loopholes in the standards to influence earnings.
The SFAS142 directed that a company should evaluate the value of a reporting unit and then compare it with the book value. This approach enables an easier verification of the source of impairment. If the declared fair value is less than the book value of the goodwill, then it is considered impaired. The average impairment losses are then calculated and accounted for. This procedure reduces the reported net income. In the process of testing goodwill, assets may result in the manipulation of income. This is because a unit’s fair value depends on the company management’s, liquid money movement and economic forces. Loss estimates can be manipulated at the company’s will in an effort to avoid reporting an impairment loss (Chambers et al 39). This is possible because an auditor cannot confirm the values under estimation. As a result, the possibility of a manipulated income or impairment loss value is likely to occur. Some experts argue that evaluation of future cash flows creates obvious loopholes.
A survey shows that companies report inflated earnings in order to avoid posting losses or reduced earnings. In addition, research has shown that some companies, which report a small impairment loss, have a little likelihood of telling the truth. Companies control their earnings or income in case of the presence of incentives (Chambers et al. 40). Managers at the helm of some companies may influence the magnitude of good will impairment to avoid a negative effect on their reputation. Some managers may use goodwill impairment evaluation in order to enhance their reputation. Researchers such as Rammana and Watts evaluate the frequency with which the management uses words that associate them with achievement. A higher frequency of positive words indicates that the concerned management is revealing more positive private information than the negative information. Among firms that do not have goodwill impairment, long tenure of executive officers, contracts and debt agreements, those with an evidence of goodwill are several According to researchers, Rihanna and watts, there is no relation between the occurrence of goodwill, and the opportunistic behaviour in company managers. Poor company performance is related to goodwill impairment losses (chambers et al. 41). Furthermore, companies may delay goodwill impairment records to post higher earnings. Evidence indicates that even with the issuance of the exposure draft, companies still hide the real figures of goodwill impairment or delay the posting of impairment losses for their own gain. Companies witnessing significantly low earnings may offer incentives to control impairment. Experts recommend that auditors should ensure the true value of goodwill impairment gets recorded.
Works Cited
Dennis, Chambers, and Catherine Finger. “Goodwill Non-Impairments.” CPA Journal. 81.2 (2011). Web.