respond to: One way in which companies can manage their earnings down is to decrease their outlook on goodwill from acquisitions. Unlike some other intangibles which are amortized, goodwill has an indefinite life and is only removed from the balance sheet via impairment. While the goodwill balance is supposed to be evaluated annually for impairment, this process is highly judgmental and has the potential to be exaggerated one way or the other $($Jordan$,$ Clark, & Vann, $2007).$ While this is very anecdotal, according to a close friend of mine who is the CEO of a reasonably sized public company, there are many managers who take advantage of the fact that goodwill is a difficult to value estimate and assume pessimistic future cash flows when they want a tax break and assume optimistic cash flows when they want to make sure their company retains a high level of assets.

While this is only a hypothetical example, in order to avoid a future debt covenant breach, companies may try to write off goodwill in years they know they can handle the decrease in earnings. What do all of you think about this? Do you agree?