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SYNOPSIS: Accountants have historically distanced themselves from the concept of negative goodwill on the premise that bargain purchases should not take place in the presence of efficient securities markets. This position has been a powerful influence on the accounting for negative goodwill for over half a century. However, in line with the expansion of fair value accounting, the latest accounting standard that addresses negative goodwill, SFAS No. 141(R), Business Combinations (FASB 2007), calls for the full recognition of bargain-purchase (negative goodwill) amounts. Rather than allocating some or all negative goodwill against selected acquired assets, as has been done previously, negative goodwill is now to be recognized in the year of the acquisition as a regular item of income or gain. In essence, SFAS No. 141(R) holds that the excess of the fair value of net assets acquired over the acquiring firm’s acquisition cost constitutes the receipt of value to the acquiring firm, and should be recognized as such. While this position may seem plausible, to our knowledge there has been no research that tests whether negative goodwill is valued. Based upon a sample of acquisition transactions involving negative goodwill, our research does not provide compelling evidence that markets value negative goodwill.

PurposeThe purpose of this paper is to examine the assessment process for goodwill impairment. The paper evaluates compliance with goodwill impairment tests required under the Statement of Financial Accounting Standard 142 and International Accounting Standard 36, highlighting challenges encountered in complying with these standards. The paper explores areas in which improvements might be made in both goodwill‐impairment compliance and disclosures and identifies areas for future research.Design/methodology/approachThe method is exploratory in nature. A combination of data collection, analysis, and interpretation is employed.FindingsThe research highlights a number of features of the impairment testing and measurement process that make implementation a challenge. Triggering events are many and vary greatly in significance and severity. Different valuation models are used and there is little conformity in the selection of discount rates. In some cases, though not consistently, control premiums are used to enhance the indicated market values of reporting units. Some firms may even deny the need for an indicated impairment charge. In all of the cases examined, the paper notes the need for judgmental estimates and the possibility that these estimates might be managed to alter or avoid goodwill impairments, limiting the comparability of results across firms.Practical implicationsThe findings will provide feedback to standard setters and practicing professionals in an effort to improve practice. For investors and creditors, the results should prove helpful in evaluating the likelihood of goodwill impairments. For researchers, the paper identifies certain questions that may provide fruitful avenues for further investigation.Originality/valueThe findings are based on an examination of a large sample of current filings of public companies that has yet to be performed. The observed richness and variation in the practices employed and disclosures provided both broaden and deepen our understanding of goodwill impairment accounting.

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