Do Canadian Companies Employ Big Bath Accounting When Recording Goodwill Impairment?

Abstract

In the transition year (2002) during which the respective goodwill impairment standards were implemented in the U.S. and Canada, these impairment losses received favorable treatment (i.e., as below-the-line expenses in the U.S. and as adjustments to retained earnings in Canada). Research in this transition year showed that goodwill impairments were recorded opportunistically in both the U.S. and Canada. Subsequent to the transition year, however, accounting principles in all countries require that goodwill impairments be presented in a more punitive fashion, with the write downs appearing as above-the-line operating expenses in the income statement. Research in the U.S. during the post-transition period provides mixed results as some studies indicate goodwill impairments are opportunistically recorded in a manner reflective of big bath behavior while others suggest these write downs convey economic information from management to users about a firm's financial performance. No such studies have been conducted in Canada during the post-transition period. The present research fills this void in the literature by examining recent data on Canadian firms and finds evidence suggesting that goodwill impairments in this country are not being recorded opportunistically to take big baths but instead are being recognized only after multiple years of substandard earnings have occurred, thus indicating managers are recording these impairments to provide relevant information to financial statement users.