[Treatment of Goodwill under New Accounting Standards]

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Acknowledgement

I would take this opportunity to thank my research supervisor, family and friends for their support and guidance without which this research would not have been possible.

DECLARATION

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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 ...