The Importance of Accounting Discretion in Mandatory Accounting Changes: An Examination of the Adoption of SFAS 142

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Abstract
This study examines SFAS 142 adoption decisions focusing on the trade-off between recording certain current goodwill impairment charges below-the-line versus uncertain future impairment charges included in income from continuing operations. We examine several potentially important economic incentives that firms face when making this accounting choice. We find evidence suggesting that firms' asset pricing considerations affect their preference for above-the-line vs. below-the-line accounting treatment, and firms' debt contracting, bonus, turnover and exchange delisting incentives affect their decisions to accelerate or delay expense recognition. We also examine the disclosures of the method used to calculate fair values and provide preliminary evidence that the extent of disclosure is associated with the accounting choices made when adopting SFAS 142. Our study contributes to the accounting choice literature by examining the manager's use of discretion when adopting a mandatory accounting change and by developing and testing explicit cross-sectional hypotheses of the determinants of firm's preferences for immediate below-the-line versus delayed above-the-line expense recognition.