Abstract

This article provides an analysis of the ethical behavior of managers making goodwill impairment decisions following the adoption of the International Financial Reporting Standard 3 on Business Combinations. Replacing the systematic amortization of goodwill with the impairment-only approach has been a highly controversial step. Although the aim of IFRS 3 was to provide users with more value-relevant information regarding the underlying economics of the business, it has been criticized for the potential earnings management inherent in impairment testing. This study is based on a sample of Spanish-listed companies between 2005 and 2011, a period that embraces the economic crisis. After controlling for the underlying economic factors of the firms, the results suggest that managers are exercising discretion in the reporting of goodwill impairment losses, and big bath and smoothing strategies are influencing the decisions, whether or not to impair goodwill and about the magnitude of the impairment. Firm size is an attribute that appears significant in the analysis, suggesting that the cost and complexity of running the impairment test affect managers’ decisions. Additional analyses suggest that the macroeconomic environment influences opportunistic and unethical behaviors