[Treatment of Goodwill under New Accounting Standards]
by
Acknowledgement
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Abstract
In 2001, Financial Accounting Standards Board (FASB) issued the rule that eliminates amortization of goodwill and instead requires annual impairment tests. This study examines desirability of eliminating amortization of evidence of market valuations of goodwill. While only weak support for initial impairment of goodwill is the strong evidence of further deterioration is found. These results support elimination of goodwill amortization for accounting regulators.
Table of Contents
ABSTRACT1
CHAPTER I: INTRODUCTION5
Background5
Changing accounting standards and move to fair value6
CHAPTER II: LITERATURE REVIEW AND HYPOTHESES DEVELOPMENT13
Historical trend13
Definition of goodwill13
Accounting for goodwill14
Development of accounting rules for goodwill accounting in different countries17
Goodwill reporting and disclosure under IFRS21
Initial overpayment for goodwill32
Indications of impairment of goodwill in acquisition33
Accounting for intangible assets34
Motivations for conducting damage36
Make announcements contain damage?38
Indications of impairment of goodwill subsequent39
CHAPTER III: METHODOLOGY41
Sample selection41
Models41
Existence of synergy, agency conflict, and/or hubris in sample41
Initial overpayment for recorded45
Initial impairment of recorded45
Subsequent impairment of47
CHAPTER IV: RESULTS & DISCUSSION48
Descriptive statistics and multicollinearity diagnostics48
Regression results52
Synergy, agency conflict, and/or hubris52
Present trend58
Accounting for goodwill58
Issues relating to treatment of goodwill from perspective of different countries59
THE Malaysian perspective68
CHAPTER V: CONCLUSION71
Management approach and disability72
Conclusion74
Outlook goodwill accounting: future75
REFERENCES77
APPENDIX96
Treatment of Goodwill under New Accounting Standards
Chapter I: Introduction
Background
Goodwill is measured and recorded as amount paid to acquire the business in excess of fair value of identifiable net assets. While this method of measurement is intended to capture excess value created by the company in motion, it is possible that amount of recorded goodwill may also reflect the payment in excess of acquired business.
Financial Accounting Standards Board (FASB) has argued that goodwill meets definition of an asset and should be capitalized. However, subsequent treatment of goodwill has been the problem. Historically, goodwill has been amortized over the period not exceeding 40 years. Statement of Financial Accounting Standard (FAS) No. 142: Goodwill and Other Intangible Assets (2001) eliminated amortization of goodwill and instead requires goodwill to be tested annually for impairment.
This study examines desirability of eliminating amortization of evidence of market valuations of goodwill, both as originally booked and further deterioration. Exposure Draft (ED) issued prior to adoption of SFAS 142 conditions stated that could indicate an initial overestimation of goodwill and also describes conditions that need to be reviewed for impairment in subsequent years (Financial Accounting Standards Board, 1999). Although this list of conditions was not included in final rule provides evidence FASB elements into account in drafting new standard. As such, these elements are basis of my analysis of market valuation of goodwill.
Results provide evidence that goodwill is generally not overvalued when initially recorded; supporting assertion that amortization is ...