Journal Article | Journal of Accounting & Economics | August 2008

The Implications of Unverifiable Fair-value Accounting: Evidence from the Political Economy of Goodwill Accounting

by Karthik Ramanna

Abstract

I study the evolution of SFAS 142, which uses unverifiable fair-value estimates to account for acquired goodwill. I find evidence consistent with the FASB issuing SFAS 142 in response to political pressure over its proposal to abolish pooling accounting. The result is interesting given this proposal was due in part to SEC concerns over pooling misuse. I also find evidence consistent with lobbying support for SFAS 142 increasing in firms' discretion under the standard. Agency theory predicts such unverifiable discretion can be used opportunistically.

Keywords: accounting; fair values; politics; standard setting; Fair Value Accounting; Goodwill Accounting; Government Legislation; Agency Theory;

Citation:

Ramanna, Karthik. "The Implications of Unverifiable Fair-value Accounting: Evidence from the Political Economy of Goodwill Accounting." Journal of Accounting & Economics 45, nos. 2-3 (August 2008). (Winner of the Elsevier JAE 2008 Best Paper Prize.)