We investigate the accounting practices of Korean listed firms that recognized and amortized goodwill and negative goodwill from business combinations in the years of 1995 to 2006. The acquirer shall, at the acquisition date, recognize goodwill from a business combination as an intangible asset. If firms amortize goodwill, the monetary amounts of amortization become expenses. Negative goodwill arises when the acquired company is purchased at a price lower than its fair value. This situation may arise either when the acquirer has a superior bargaining power, or when identifiable assets have been overstated or identifiable liabilities have been omitted or understated. We witness a big increase in the recognition of negative goodwill from 2000 thanks to the new accounting standards for business combinations. The new standards allow firms to recognize negative goodwill when the acquisition price is lower than the acquirer’s interest in the fair value of net identifiable assets acquired. We believe that the frequent recognition of negative goodwill in Korea is attributable to three factors: use of book value instead of fair value, low price to book value ratios and business combinations between affiliated firms. The amortization of goodwill and negative goodwill affects both balance sheet and income statement. It implies that firms may have incentives to manage earnings by using goodwill and negative goodwill accounting. Furthermore, accounting standards for business combinations allow firms to choose arbitrary amortization periods. If firms amortize goodwill or negative goodwill, the amortization becomes a part of earnings and will impact debt ratios as well. Accordingly, we expect that the firms with negative goodwill will have stronger incentives to manage earnings as compared to the firms without negative goodwill, particularly when they amortize negative goodwill. Based on the new accounting standards for business combinations which became effective from 2000, we divide our sample period into the 1995-1999 period and the 2000-2006 period. We find that increasing number of firms recognize goodwill as a result of increased business combination transactions. In addition, the ratio of goodwill amortization to net sales also increases in the 2000-2006 period. There are even more explosive increases in negative goodwill recognition in the 2000-2006 period, thanks to the adoption of the new accounting standards which allow firms to recognize goodwill or negative goodwill from elimination differences as well as mergers and acquisitions. We reviewed all consolidated audit reports of firms that recognized goodwill and negative goodwill during the study period. We find that the major sources of goodwill and negative goodwill come from elimination differences while mergers and acquisitions account for much less. We document that the footnote disclosures on goodwill and negative goodwill are insufficient. Furthermore, the major source of goodwill and negative goodwill recognition comes primarily from business combinations between affiliated firms that are controlled by the same controlling shareholders. We also note that the amortization periods of goodwill and negative goodwill are not systematic. A serious inconsistency was found in the amortization patterns of goodwill and negative goodwill between the audit reports and financial statements, indicating that firms do not pay much attention to disclosures. To our surprise, only 16.5% of firms use the straight-line amortization method for goodwill and 31.7% for negative goodwill despite the fact that the accounting standards require firms to use the method over the period not exceeding 20 years. More than 50% of firms amortize good will and negative goodwill within five years, including about 13% of immediate write-off firms. Though some firms use the maximum amortization period for goodwill, none use the maximum period for negative goodwill amortization. In order to measure the systematic application of amortization of individual firms over time, we use a ratio of the maximum over the minimum amount of amortization for the firms which have no increase in goodwill or negative goodwill. Theoretically, the ratio should be 1. However, the ratio ranges from 1.3 to 1,615 for goodwill and 215 for negative goodwill, indicating an arbitrary amortization rate of goodwill and negative goodwill in practice. We further investigate how pre-amortization profit affects firms’ amortization policy. When a firm amortizes goodwill or negative goodwill unusually high, this may indicate that the firm either has good or bad pre-amortization profit. We find that firms amortize goodwill unusually high in the year when pre-amortization profit is high relative to prior years. In contrast, the treatment firms amortize negative goodwill unusually high in the year when pre-amortization profit is low compared to prior years. We compare the characteristics of the firms amortizing goodwill or negative goodwill with the control firms in terms of accruals. Average accruals for the firms amortizing goodwill is generally lower than for the control firms, but there are no particular differences in accruals between the firms amortizing negative goodwill and the control firms. The current accounting practices for negative goodwill accounting can be characterized by the opportunistic utilization of the accounting standards for business combinations by many conglomerate firms of Korea. However, our empirical results in general reveal that the impact of negative goodwill accounting on earnings and leverage ratios is not so far fetching as alleged by the regulatory body. In other words, despite the allegation and regulation by the Financial Supervisory Commission of Korea that some firms obviously used negative goodwill accounting opportunistically as a vehicle to manage earnings and debt ratios, our results support the allegation in a limited manner.