The Optional Qualitative Assessment in Impairment Tests

The qualitative assessment allowed after December 2011 is intended to reduce the complexity and costs of impairment tests for goodwill and other indefinite-lived intangibles. This assessment is unique because it gives an unconditional option to companies and depends on subjective qualitative judgment. We demonstrate that firms using this option have comparatively better financial performance and face higher expected costs for conducting quantitative tests. Using a difference-in-differences research design, we show that firms using this option have a marginally higher incidence of impairments, suggesting that the qualitative assessment does not systematically allow companies to avoid write-downs. We do not find consistent evidence that this option decreases the timeliness of impairments or increases monitoring costs for auditors, regulators, and investors. Our study provides evidence about the intended and unintended consequences of a revised impairment approach and speaks to the broader issue of allowing unconditional options and qualitative judgments in financial reporting