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The measurement and reporting of intangible assets are key emerging issues for the FASB and the IASB. We contribute to the discussion by examining (a) how reporting incentives and business indicators impact impairment differently for definite and indefinite intangible assets, (b) the moderating role of internal and external monitoring on impairment recognition, and (c) the variation in media and analyst coverage based on the type of intangible asset. Our findings reveal disparities in impairment indicators and a significant impact of reporting incentives, particularly for acquired intangibles. This highlights the necessity of separately analyzing the impairment of definite and indefinite intangibles and goodwill. Second, internal and external monitoring strongly moderates the likelihood of asset impairments for indefinite intangibles and goodwill under high impairment pressure. This highlights the risk of undermining the quality of financial reporting through discretion in accounting for intangibles, but also the role of strong corporate governance in enhancing the reporting quality of intangibles. Third, we find that even sophisticated users, i.e., the media and analysts during conference calls, do not pay sufficient attention to the impairment decisions of definite and indefinite intangibles, allowing firms to exploit the discretion in intangible impairment that remains under the radar. Overall, our study contributes to the scarce literature on indicators of impairment of non-goodwill intangibles by providing empirical evidence that impairment indicators differ between definite and indefinite intangibles and how media coverage and analyst’s questions on conference calls differ for impairments of definite and indefinite intangibles and goodwill. Given the growing importance of intangibles, our findings are relevant to accounting regulators, analysts, auditors, investors and others in assessing the risk of impairment of intangibles.
Rationalization of Financial Misreporting: Does Entitlement Matter?
Maximilian Rohmann, Alexandra Lilge
Leibniz Universität Hannover, Deutschland
To investigate the rationalization of financial misreporting, we examine the effects
of an externally caused bad environment on misreporting and entitlement.
We conduct a 2x2 between-subjects experiment, manipulating the environmental
state and the awareness of those environmental states. We predict and find that a
bad environmental state causes a higher rate and a higher degree of misreporting.
This effect occurs due to a greater sense of entitlement among participants in response
to a bad environmental state. We also show that this effect vanishes if managers
are unaware of other environmental states. As managers cannot blame the
bad environmental state when they are not aware of better environmental states,
the sense of entitlement is lower. As a result, a bad environmental state does not
cause a higher rate and a higher degree of misreporting if managers are unaware
