The Information Content of Goodwill-impairments Under FAS 142: Implications for External Analysis and Internal Control

With its standards FAS 141 and 142 the Financial Accounting Standard Board has revo-lutionized the accounting for business combinations. One of the major changes is theabolishment of goodwill-amortization, which has been replaced by an annual impairmenttest at the level of a reporting unit. Among other things, this new regulation is intended toimprove the information content of goodwill accounting. This paper investigates into theinformation content of such an impairment from the perspective of external or internalfinancial analysis. I examine how impairment losses resulting from FAS 142 should beinterpreted and treated in the internal and external performance analysis. My analysisshows that an impairment can be due to several reasons, not just to a deteriorating eco-nomic performance. In particular, the way the impairment test is conducted according toFAS 142 may even lead to a discrimination of economically viable investment projects.