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The Effect of Reporting Unit Goodwill Disaggregation on Impairment Assessments: Evidence from Critical Audit Matters
Tipton, Colin
Tipton, Colin
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2025-08
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Business Administration/Accounting
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https://doi.org/10.34944/y43g-yk77
Abstract
Goodwill is an intangible asset generated when the consideration paid in a business combination exceeds the fair value of the identifiable net assets received by the acquirer. Under U.S. GAAP goodwill impairment assessments are required to be conducted on reporting units at least annually. Management has discretion to disaggregate goodwill by defining more reporting units and by defining reporting units at less consolidated levels (i.e. the firm, segment, or sub-segment). Using recorded impairments, goodwill-related critical audit matters (CAMs), and hand-collected data on the number and level of reporting units, I find that the degree of goodwill disaggregation is associated with a higher likelihood of impairment and higher magnitude impairments. Using future operating cash flows, I find a positive non-linear relationship between the degree of goodwill disaggregation and the predictive value of impairments, with sub-segment-level disaggregation not providing more predictive power than segment-level disaggregation. Using the text of CAMs, I find that auditors emphasize the subjectivity of goodwill that is not disaggregated and the robustness of their related audit procedures, suggesting an association between the degree of disaggregation and the auditor’s perceived business risk. Taken together, my findings suggest that changing the unit of assessment from reporting units to segments may reduce the likelihood and magnitude of impairments, but not their informativeness. These findings may be of interest to the FASB, which recently considered changes to the unit of assessment for goodwill impairment.
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