No. 137: Under the Radar? Discretionary Impairments of Definite and Indefinite Intangible Assets

The measurement and reporting of intangible assets are key emerging issues for the FASB. 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) how the coverage of impairment of intangibles vary in media and by analysts based on the type of intangible asset. Our findings reveal disparities in impairment indicators across different types of intangibles and a significant impact of reporting incentives on the impairment decision, particularly for acquired intangibles. These findings highlight the necessity of separately analyzing the impairment of definite and indefinite intangibles and goodwill. Second, internal and external monitoring strongly moderate the likelihood of impairments for indefinite intangibles and goodwill for firms that face high impairment pressure, indicating 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.