Browsing by Subject "earnings targets"

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  • Storå, Jakob (Svenska handelshögskolan, 2013-05-28)
    There is a great deal of research indicating that firms use the flexibility in accounting standards to engage in earnings management. This study examines whether firms that apply IFRS manage earnings through goodwill impairment accounting. IFRS require that firms shall test goodwill for impairment annually and whenever there is an indication that goodwill may be impaired. Impairment tests involve estimating the value of goodwill. More specifically, if the book value of goodwill exceeds its recoverable amount, as estimated in connection with an impairment test, the firm shall recognize the excess as an impairment loss. However, estimates of recoverable amounts for goodwill are subject to a high degree of unverifiable discretion. This suggests that goodwill impairment tests might be used for earnings management. This study examines earnings management in relation to earnings targets. It focuses on two earnings targets that might create incentives for earnings management: zero earnings and the previous year’s earnings. The findings of the study are consistent with the prediction that firms that apply IFRS manage earnings through goodwill impairment accounting. The findings suggest that firms manage earnings upwards by impairing less goodwill when pre-impairment earnings barely exceed an earnings target, presumably in order to avoid falling short of the target. Further, the findings suggest that firms manage earnings downwards by impairing more goodwill when pre-impairment earnings clearly exceed or clearly fall short of an earnings target, presumably in order to inflate future earnings.