TREATMENT OF GOODWILL UNDER NEW ACCOUNTING STANDARDS

Treatment of Goodwill under New Accounting Standards

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.

Treatment of Goodwill under New Accounting Standards

Introduction

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.

Purpose of Study

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.

Rationale of Study

We also investigate to what extent we can say with confidence that recognition of goodwill and post-acquisition norms for recognition of goodwill "impairment" has improved information available to users of financial statements and / or whether this development has largely resulted in provision of self-interested managers with greater opportunities to participate in profits and stock manipulations that are of dubious value to users.

Implications

Results provide evidence that goodwill is generally not overvalued when initially recorded, supporting assertion that amortization is not justified. results also provide strong evidence that good will can be altered later as indicated by conditions of identification. At that time, it would be convenient to write goodwill impairment charges. Thus, this study supports FASB's decision to replace amortization of goodwill amortization failure.

Although balance sheets produced with financial reporting purposes have never been built to provide the current fair value of company to an investor, advocates of more frequent reporting of intangible assets criticism that they do not adequately reflect value of intangible assets, these spreadsheets provide users - primarily investors and analysts - with potentially misleading information regarding "true" value of company. In this paper assesses whether from introduction of "fair value accounting" in relation to treatment ...