The Optional Qualitative Assessment in Impairment Tests

We examine optional qualitative assessments in impairment tests of goodwill and indefinite-lived intangibles. These assessments are intended to reduce impairment testing complexity, but introduce accounting optionality. We find that firms performing qualitative assessments face lower impairment risk and higher costs of performing quantitative impairment tests. Then, using a difference-in-differences design, we find that qualitative assessment firms have a higher incidence of impairments vs. firms disclosing nothing about qualitative assessments, suggesting that qualitative analysis may make it more difficult for managers to manipulate quantitative tests to avoid impairments. We also find that qualitative assessment firms exhibit no reduction in impairment timeliness, and find no evidence of increased monitoring costs for auditors, regulators, and investors surrounding the accounting standard change introducing qualitative assessments. Our findings inform standard setters about the determinants and consequences of qualitative assessments and speak to the broader issue of the costs and benefits of optionality in accounting.