For earnings management, is impairment of goodwill easier to manipulate than impairment of PPE?
To determine whether impairment of goodwill is easier to manipulate than impairment of property, plant, and equipment (PPE) for earnings management, we need to understand the concepts and characteristics of both.
Impairment of goodwill:
- Goodwill represents the intangible value of a company's reputation, brand, customer base, etc., acquired through business combinations.
- Goodwill is only tested for impairment when there is an indication that its value may be impaired, usually done annually.
- Impairment occurs when the carrying value of the goodwill exceeds its recoverable amount (the higher of fair value less costs to sell or value in use).
Impairment of PPE:
- PPE represents tangible assets like buildings, machinery, equipment, land, etc.
- PPE is tested for impairment when there are events or changes in circumstances indicating that its carrying value may not be recoverable.
- Impairment occurs when the carrying value of the PPE exceeds its recoverable amount (higher of the fair value less costs to sell or value in use).
Now, let's consider the question.
1. Subjectivity: The impairment of goodwill is often seen as more subjective compared to PPE. Goodwill's value is based on estimations and assumptions, such as revenue projections, discount rates, and growth rates. This subjectivity could potentially provide more room for manipulation.
2. Visibility: Impairment of goodwill is usually disclosed as a separate line item on the income statement, making it more visible to investors and stakeholders. Manipulation of goodwill impairment may raise concerns and scrutiny from financial analysts and regulators.
3. Timing: Impairment of goodwill is typically tested annually, whereas impairment of PPE is triggered by specific events or changes in circumstances. The annual testing allows for potential timing manipulation as management can influence the recognition of impairment charges.
Considering these factors, it can be argued that impairment of goodwill may be relatively easier to manipulate for earnings management compared to impairment of PPE. However, it is crucial to note that manipulation of either type of impairment is subject to regulatory oversight and scrutiny. Financial statement users and regulators closely monitor these measures to identify potential manipulation attempts.