Informativeness of Discretionary Disclosures of Goodwill Slack

Recently, the SEC’s Division of Corporation Finance (CorpFin) has added an additional guidance to its Financial Reporting Manual (FRM) with respect to the disclosure for goodwill. For firms at a risk of failing the step one of goodwill impairment test, this guidance recommends that firms consider reporting the percentage by which the fair value exceeds carrying values of the reporting unit — slack — when the fair value is not substantially in excess of carrying value. This CorpFin guidance does not specifically identify what is meant by substantially in excess. We examine the consequences of this disclosure guidance and find evidence consistent with the FRM’s perceived goal: investors and analysts seem to be able to better predict future goodwill impairments for firms disclosing lower slack levels. These results suggest that information conveyed through slack disclosures has led to an increase in the quality of information available to investors regarding future impairment of goodwill.