In 2002, following its adoption of a new accounting standard issued by the FASB for the impairment of goodwill accounting, AMR Corporation, the parent company of American Airlines, conducted an impairment test of its existing goodwill which had largely arisen in conjunction with American’s acquisition of TWA in 2001. Based on this test, AMR Corporation concluded that its entire balance of \($1.4\) billion of goodwill had been impaired. Consequently, at year-end 2002, the company recorded a one-time, noncash charge to write off all of its goodwill. The charge-off of AMR’s goodwill was reported as a “cumulative effect of accounting change” in the amount of \($988\) million, net of the related income tax effect of \($412\) million, on its consolidated statement of earnings.

Discuss AMR’s treatment of its goodwill impairment charge. Do you agree with the disclosure adopted by the company? Why or why not? How will the impairment affect the firm’s future sustainable earnings?