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In accounting the treatment of purchased goodwill is the most controversial issue. Over the past decades, numerous debates have been raised to deal with the problems and issues associated with the valuation of goodwill. This study reviewed some of the academic researches and found that academic debates have mainly centered on the bookkeeping problems of the subsequent values such as cost allocations, impairment, and profit inflation rather than the problem of the acquisition value. After examining past accounting approaches and other issues surrounding the valuation of goodwill, it was discovered that the main accounting problem is primarily related to the accountability of management in regards with the determination of the initial value, rather than the analysis of the firms' bookkeeping treatments. By means of the examples and illustrations of the accounting techniques and valuation theory, this study confirms that controversy will remain, not just in regards with the subsequent valuation and bookkeeping aspects of the transactions, but chiefly in regards with the determination of the initial value and incorporation of accountability in the process of accounting for goodwill. In the final section a normative and independent valuation model is suggested that has the limited objective of improving the analysis and valuation of the goodwill acquisition. Keywords: Purchased goodwill, Initial recognition, Accountability of management
Article Type:
Report
Subject:
Accounting Valuation
Authors:
Pashang, Hossein Fihn, Glenn
Pub Date:
03/01/2011
Publication:
Name: Review of Business Research Publisher: International Academy of Business and Economics Audience: Academic Format : Magazine/Journal Subject : Business, international Copyright : COPYRIGHT 2011 International Academy of Business and Economics ISSN: 1546-2609
Issue:
Date: March, 2011 Source Volume: 11 Source Issue: 2
Topic:
Event Code: 200 Management dynamics Computer Subject : Company business management
Product:
Product Code: 9915400 Accounting Methods SIC Code: 8721 Accounting, auditing, & bookkeeping
Accession Number:
272616355
Full Text:
1. BACKGROUND, PROBLEM AND OBJECTIVE OF THE STUDY Over the past decades, the accounting concept of goodwill received a large number of suggested analyses. In majority of the academic research, the suggested analyses were placed around the treatments of the subsequent valuations with a particular emphasis on the bookkeeping aspects of goodwill. In essence, observations of bookkeeping variations of the practices were point of departure of the goodwill analysis in the past literature (see Tollington, 1998; Dunne and Rollings, 1992; Watts, 2003). Writers who attempted to examine the initial value of goodwill are surprisingly few. The reason for this shortcoming should be related to the problem of disclosure and the notion that few companies reveal information about the nature of the exchange value of the purchased companies in their annual reports. Consequently, the focus of the academic debate was mainstreamed towards the managerial problems of fair value estimates, intangible identification, and the difficulty of keeping the purchased goodwill distinguished from the internally generated goodwill (Watts, 2003; Holthausen and Watts, 2001). The question that comes to mind is, why managerial attitude and preference for the choice of bookkeeping forms for the accounting of the subsequent values, reflected in the diversity of practices, should be used as a ground to look into the prospect for goodwill accounting. Thus, the researchers either omitted or did not explain the problems that are associated with valuation of goodwill acquisition and the need of independent value recognition at the initial level of the accounting process. In fact, certainty of the initial value is a key input for the calculations of subsequent values and choice of bookkeeping procedures (Pashang and Fihn, 2010). The objective of this study is that through the review of the literature, ideas of the classical accounting theories, examples of the accounting techniques, and definitions of a few fundamental accounting valuation concepts to provide an understanding for the acquisition value of the goodwill. 2. INTERPRETATION OF THE PREVIOUS GOODWILL ACCOUNTING APPROACHES Over time, the value justification of goodwill has been debated in regards to the diversity of bookkeeping practices, which were often aimed to inflate the firms' net income. Nevertheless, even in those value justifications, where the bookkeeping techniques dictate both the form and the value of goodwill, there is a problem with the understanding of the acquisition value and managerial accountability through which, this value supposed to enter into the structure of balance sheet. At first sight, the problem attached to the acquisition valuation is commensurate with the information available to management, and thus a workable accounting technique assumed be derived from the analysis of the managerial decision upon the choice of value. An attempt to examine this value independently from the subjectivity of managerial assessment will be made later in this study. This section is concerned with the review and critical analysis of the approaches that have been applied so far in the justification of goodwill accounting. Our review of the current and past literatures could identify four categories of the goodwill accounting approaches in the following ways: 2.1 Goodwill was on-balanced and directly written off The write off approach is based on the assumption that value of goodwill should be entirely written off at the balance sheet as soon as it is purchased. At first site, the technical justification of this method should be related to the balance sheet oriented viewpoints of the pragmatic approach in the acceptance of accounting principles. A balance sheet oriented viewpoint has been challenged by accountants who prefer that the value treatment of goodwill should be relevant for the income statement. According to Rihahi-Belkaoui (2004: p. 111) the balance sheet oriented approach could not solve the problem of conflicts in the acceptance of the accounting principles which finally led to the emergence of the position of profit oriented acceptance of the accounting principles. The disappearance of goodwill from the balance sheet has three immediate accounting consequences. (1) It is against the principle of offsetting of accounts which leads to the elimination of goodwill information. (2) It is against the principle of prudence by disallowing the goodwill expense (credit) charges which leads to the inflation of net income. (3) It is against stewardship or managerial accountability in the sense that managers cannot be held accountable for the continuity and discontinuity of the goodwill value. The approach of direct write off implicates the assumption that goodwill is the property of shareholders and that its value should be treated at the balance sheet not at the income statement. On the other hand, an income statement approach assumes that goodwill is an intangible asset which belongs to the entity (organization) and thus its value should first be operationally measured and its annual costs should be periodically matched with revenues. Principally, the value of operational assets should be decided by means of cost allocations, for example, a measure of amortization (Hendriksen, 1982; Most, 1977; Littleton, 1985). Drawing on Littleton, since goodwill is an operational asset--that is, it is intended to be used to affect the revenue--therefore its cost should be matched against the related revenue. The task of accounting is not the maintenance of the interest of principal, the task of accounting is to determine the income by "associating revenue charges and their proper credits"(Littleton, p. 23). In the past literature, a considerable attention was given to the critical analysis of the bookkeeping policies adopted by managers to write off goodwill and eliminate it from the balance sheets. The most common accounting treatment was the immediate write off against reserves in line with the principle of prudence (Seetharaman et. al. 2004). The policy of immediate write off resulted in the several types of creative bookkeeping treatments. Creation of negative goodwill write off reserve, provision of future rationalization costs, write off against share premium accounts, and write off against revaluation reserve are examples of the bookkeeping treatments that were observed over time. The policy of immediate write off, which has a number of nuances, was abundantly debated in association with British accounting practices. By means of SSAP (Statement of Standard Accounting Practice) 22 in 1984 a few prescriptive rules were issued that allowed that goodwill should be written off immediately against the reserves. The direct write off recommendation was legitimated on the basis that "the treatment is consistent with not recognizing internally generated goodwill (Seetharaman et. al. 2004, p. 140)". A preference for the policy of immediate write off is, in fact, not only against the principle of accrual accounting, but also against the principle of prudence. As we know, the costs of internally generated goodwill have been expensed periodically on the assumption that these are period costs and thus in the absence of evidence for the capitalization of these assets their costs should be periodically expensed as they are assigned. IAS 38 only allowed capitalization of the development part of R&D costs but the internally generated goodwill (recognized as nonidentifiable assets) should be expensed periodically. A similar treatment requires that even the cost of purchased goodwill, which is defined as a non-identifiable asset, to be allocated periodically. This means that, the approach of direct write off method would not lead to the similarity of treatments between the purchased and the internally generated goodwill. On the contrary, the use of direct write off method created dissimilarity in the accounting treatments and coherence in the use of principle of prudence. We argue that the debate upon the differences in bookkeeping is useful if it is related to the theoretical discussions and the differences in adoption of valuation system and accounting principles. Widening the issue in question, we emphasize that the approach of write off method favors the ownership theory of accounting, which inherently carries on a large amount of disagreement upon the use of valuation method and disclosure. According to Kam (1990, p. 407) Chamber, who was one of the advocators of direct write off method, had a major influence on goodwill being recorded as a reduction of stakeholders' equity. He believed that "goodwill belongs to the stockholders of the combined entity, not to entity itself". At the level of practice, for a long period of time, countries, like Germany and The Netherlands, followed the British accounting approach of direct write off (Dunne and Rollings 1992), but these countries moved towards the amortization method in line with the modernization of their accounting standards. Due to unfavorable criticisms, in 1997, the UK changed its previous position and adopted the IAS/IFRS (International Accounting Standards/International Financial Reporting Standards) position. 2.2 Goodwill was used to affect the revenue In this category, two versions of value treatments, which have, more and less, the similar accounting consequences can be identified. The first one emerged from the exercise of the pooling of interest method and the second one from the modification of this method that was later on named the polluted purchase method. In the current literature, this accounting situation was rarely mentioned and therefore no analysis of the consequences of these accounting methods was presented (see e.g. Grinyer et. al. 1990; Seetharamanel. al. 2004; Carlin et. al. 2009). In group accounting, the approach of the pooling of interest method will result in the non recognition of goodwill on the balance sheet. The use of this approach was highly popular in the USA up until the year 1990. After several years of resistance, in year 2000, FASB (Financial Accounting Standards Board) issued its basic critics of the method and showed interest for the adoption of the purchase method of group accounts promulgated by IASB (International Accounting Standards Board). The pooling of interest method (see Accounting Research Bulleting No. 43) is based on form, rather than substance, meaning that the carrying forward of the two, or several, book values should characterize the group accounts. The overvaluation of assets by means of market value that led to the stock market crash of 1929 created a favorable environment for the development of pooling of interest method (Kam, 1990). In essence, the pooling of interest method maintains the premises of the ownership theory of accounting in determining the combination. The following example illustrates the deficiency of the pooling of interest method to deal with goodwill. Assume that company P issues shares that has 120 000 USD market value. The objective of the company P is to combine company T with 60 000 USD book value by means of the pooling of interest method. Because the higher market value of the T's share (substance) is not recognized, the difference of 60 000 USD boosted the income over the years in terms of gain. In addition to this, if transaction was carried, for example, at December, the pooling of interest method allowed that 12 months of T's income to be combined with P's income. The resulting consequence was that P's earnings per share became considerably inflated. Further, the elimination of goodwill asset from the balance sheet allowed a manager to boost the net income of the entity without providing evidence that the acquired goodwill could really produce benefit for the firm. Later on, an alternative treatment that led to the recognition and capitalization of goodwill was proposed in ARP no. 40. This alternative treatment allowed that goods be capitalized and the value of which inflates the net income periodically. Essentially, this new method had the same function as the pooling of interest method, and therefore, it was named as polluted purchase method. Valuation justification was drawn from the definition that goodwill has indefinite life. Since goodwill was not a taxable item therefore its value inflated the income without consideration of accrual accounting, expense charges, and accountability of managers in providing evidence about the life and the periodical value impact of the goodwill. Theoretically this treatment can be related to ownership theory of the goodwill valuation. Later on, year 1970, Opinion 17 required that goodwill be amortized within a period less than 40 years. This latter approach was adopted from the interpretation of the ideas related to the continental European goodwill accounting and the approach of income statement treatment. 2.3 Goodwill should be amortized. The majority of the current researchers have shown, in a variety of ways, an impression that supported the amortization approach of the purchased goodwill (Wines et. al. 2007; Carlin et. al. 2009). Yet, none of the researchers commenced a convincing value debate upon the problem of the initial value. Instead, by focusing on the bookkeeping treatments and discussing the problems associated with the criteria used in the impairment of goodwill, these writers challenged the IAS/IFRS standpoint and pursued a change in favor of the amortization approach. As an example, Massoud and Raiborn (2003)Cearns (1999) and Miller (1995) raised the issue of impairment that provided abundant opportunities for management interpretation and bias of value, and thus, asked for the amortization approach. However, Grinyeret. al. (1990) argument for amortization was augmented with a theoretical discussion linked to the acceptance of accounting principles which are linked to the profit oriented position of pragmatism and the use of the accrual model of cost allocation. In total, the debate was centered on the managerial problem of the subsequent valuation. Goodwill amortization is virtually related to the culture of continental European accounting practices. The principle of prudence is often used for the justification of this practice. However, in justification, the evidence was not drawn from the qualitative continuity and discontinuity of the goodwill value rather than from the observation of the role of bookkeeping practices aimed to avoid a market crash. This means that no evidence was provided to indicate that amortization of goodwill asset on the arbitrary basis produce a "real conservatism" in the presentation of the value of goodwill. That is to say that evaluation of bookkeeping techniques replaced evaluation of the object underlying the bookkeeping. In Sweden, goodwill was recommended to be amortized within 5 years. While, in the USA, the prescribed amortizations time was 40 years. None of these practices, together with the related standards, was accompanied with a value discussion about why just these periods of time are representative of the diminishing of the value of goodwill. In spite of the arbitrarily determined nature of amortization, this method has three obvious advantages. The advantage of amortization over other methods presented previously is that (a) it prevents variations in bookkeeping treatments (see section of direct write off method), and, it (b) helps reducing the possibility of using the income statement for the purpose of earnings management (see sections 2.1 and 2.2). Finally, amortization (c) creates a state of accounting comparability between the internally generated goodwill and purchased goodwill in the sense that it allows the total costs of their appearances to be reduced, though arbitrarily, from the revenues. 2.4 IASB and the approach of goodwill impairment Categorically, the approach of the goodwill impairment should be related to the balance sheet position of the pragmatic idea in which the ownership interest is primarily focused. However, IASB's prescriptions for the determination of the nature of goodwill, as a group of intangible assets, can be primarily associated with the purchase method of business combination which originally emerged from the ideas based on the entity theory of accounting. The purchase method emerged from the consideration that there is a need to replace the legal form of combination based on the pooling of interest method with a method that can reflect the economic reality of combination. By definition all business combination are, for accounting purpose, considered to be acquisitions, whereby one entity (the parent) takes management control of another entity, or of its assets and liabilities (Epstein and Ali Mirza 2005: p. 348). In this definition, the concept of ownership of shares is replaced by the concept of control to emphasize the economic reality that determines the combination. For example, if the acquirer (parent company) does not obtain over one-half of the voting rights and meanwhile has a power of control over the acquired companies resources a purchase method should be applied (see IAS 27, 36, 37, 38; IFRS 3). Reasoning theoretically, the purchased method, which emphasizes on the concept of "power", emerged from the premises of entity theory of accounting to indicate that accounting information should serve a broader context of stakeholders (Paton, 1922) rather than the ownership alone. Valuation, in this light, should be operationally relevant reflecting the accountability of the manager who has power over the entity's resources. As firms' share of intangible assets increased, the group accounts accumulated a large amount of non-identified items, defined as goodwill, on the balance sheet. In solving this problem, the IASB provided a large set of standard procedures with the aim to reduce the volume of goodwill. However, since the IASB's rules were inefficient and non-theoretical, consequently the adoption of which led to the state of accounting irregularities. IASB's rules allow goodwill value to be captured in terms of management subjectivity rather than sound accounting criteria. In regards with IASB's rules, the following problems are identified. 1: Procedures given by IASB for the determination of the purchase price and conduction of acquisition accounting is vague and impractical. At the first site, the emphasis is given to the determination of the nature of the purchased asset by means of fair value rather than valuation of the asset purchased. The standard setters confused the value concept of transaction by price with transaction by negotiation (see section 3). IASB's rules of acquisition accounting left a great space for managerial discretion upon the identifications of assets which affect the value of goodwill at the initial level. For example, in Swedish accounting the intangible assets are rarely identified by managers which resulted to the increase of the value of goodwill on the balance sheet. 2: There is a disharmony in regards with uniformity of accounting policies. IAS 27 does not require that the combined companies should have similar accounting policies, rather it merely requires that "there be adequate disclosure of the accounting principles employed" (Epstein and Ali Mirza 2005: p. 363). As a consequence of this, the purchase of two similar companies may result in the recognitions of the two different goodwill values. 3: The requirement of impairment is not motivated by workable criteria. This means that an undependable valuation of the amount of impairment is not prescribed. For example, IAS 38 and IFRS 3 give the significance that purchase price is a discretionary price (cost). Viewed as such, all types of discretionary costs should be treated as the period costs (Drury, 2004), which means that to be consequent, a subsequent identification of the value of goodwill should be based on accrual accounting and method of periodically cost allocations. 4: Goodwill value is not related to the basis of accountability. That is to say, managers were given large spaces to decide for the value of impairment and the life of assets without being accountable for the future benefit of the purchased goodwill and the maintenance of its value continuity. In addition to the above mentioned problems, the acquisition valuation and accounting treatments of the negative goodwill, mandated by IFRS 3, is seen as being the most controversial issue. According to the standard definition, the negative goodwill (like positive goodwill) is a residual after identifiable assets and liabilities when fair value is assigned. By means of a Swedish example we illustrate the accounting problem attached with the negative goodwill. Suppose that company P purchases company T for 80 MSEK (million Swedish Crowns). Further, assume that the management analysis of the T's assets and liabilities fair value resulted in 100 MSEK fair value assignments. This means that the fair value of the identifiable assets is 20 MSEK higher than the purchased price! If we forget about the credibility of such transaction, the question is how the negative goodwill should be accounted? According to Swedish interpretation of the IFRS 3, the negative goodwill, 20 MSEK in total, should be divided into two parts in the following way: The first part of the negative goodwill should be determined as an excessive future cost (e.g. 15 MSEK). The second part should be related to the price of the physical assets (e.g. 5 MSEK). According to the standards, the first part should be added to the net income during the two subsequent years. The second part should be also added to the net income but according to a 10 year plan. That is to say, it is allowed that the negative goodwill inflates income before tax by 20 MSEK. The standard mandates that managers should decide for the operation of accounting. Putting this discretion in the context of earnings management, it is not difficult to assume that managers have the incentive of increasing the value of negative goodwill by reducing the amount of assigned fair values to the purchased assets. In this way, the net income can be substantially inflated. The paradox that we experience is that practically both positive goodwill and negative goodwill is allowed be used to inflate the income. 2.5 Some conclusive remarks on the current and previous goodwill accounting We identified and critically analyzed the four categories of goodwill asset treatments. These are direct write off method, pooling method, amortization method and finally impairment method. A common denominator of these goodwill treatments is that regulators applied a common sense reasoning for the justification of their rules without consideration of an undependable value discussion. The direct write off method inflated the income by disallowance of the goodwill expense charges, while the polling (and polluted purchase) methods allowed that income be inflated in terms of gain. The paradox of the common sense reasoning of IASB is more evident, if goodwill is not impaired. Under this condition, the bookkeeping effect of the negative and positive goodwill is similar. Both bookkeeping methods inflate the net income. The review of the current literature indicates that there is more agreement among the researchers in favor of the amortization method. However, in none of the researches was the problem of initial value of the goodwill theoretically (normatively) analyzed. The remaining part of the study focuses on the acquiring value and accountability consideration of the goodwill accounting. 3. INITIAL VALUE OF THE GOODWILL As previously discussed, the bookkeeping reasoning of the goodwill valuation has resulted in several versions of goodwill accounting, which proved to be incoherent, contradictory and controversial. It was also emphasized that, an understanding of the accounting of goodwill needs theoretical reasoning and conceptual sharpening. In particular, we need an additional sharpening of the concepts by which we theoretically reason the perplex problem of goodwill accounting at the level of acquiring, recognition, and in-balancing. In so doing, we emphasize first on the meaning attributions of the concept of value. According to Most (1977) value, which originates from the French concept of valoir, has two dimensions, ethical and material. The accounting conception of the ethical dimension is intangible and of the material is tangible. The role of accounting is to record the values of the operational assets, intangibles and tangibles, by money code as a means of representation. Thus, valuation in accounting is the assignment of numerals to intangibles and tangibles. The system of money account (money scale) works, in fact, as the representative of the category of numerals. The concept of price, or the money paid to get an asset, should not be confused with the value of the asset as an operational resource. The money is paid to transfer an object (material and immaterial) not to measure its value. In practice, accountants usually, but not always, use the price paid as a means to represent the value in use. The task of accounting is to calculate the period consumption of the value in use and charge this value against the related revenues (Littleton, 1985). Concerning with the problem of acquiring an entity, the money is used as a medium of exchange rather than as a measure of the value of entity. When there is a possibility for market transactions at the moment of acquisition, the price paid can be used as a ground for bookkeeping. In this regard, the price paid is equated with the use value. However, in goodwill accounting the problem we should face is that the price paid for the acquisition of an entity is based on bargaining a highly subjective form of value assessment rather than transaction. In addition to this, the object purchased contains a set of intangible assets that is often difficult to evaluate due to its operative utility (usefulness) at the moment of acquisition. The first question that comes to mind is if we can use bargain as a basis of our bookkeeping? In case, the answer is yes, then there emerges another question: who is accountable for the transfer, maintenance, benefit, and amortization of the value of the purchased entity? A possible answer to these questions can be drawn from the interpretation of the works of classical accounting writers. In their introduction to corporate accounting standards, Paton and Littleton (1940) stressed the following viewpoint: "If an enterprise has superior earning power- that is, has the ability to earn more than a normal or representative rate on the tangible resources present, computed from the point of view of a prospective purchaser--and such superiority cannot be accounted for by specific monopolistic grants such as those represented by parents or franchise, the concern may be said to possess goodwill or general intangible value" This definition gives useful information for the understanding of the value of goodwill. Concerning with the initial value of the purchased goodwill, the above statements are very clear--the value of goodwill emerges from the computation carried out from the point of view of a prospective purchaser, for example, a manager. The important point worth mentioning here is that in this definition the concept of superior earning power represents firm's intangible assets. To simplify this point, goodwill is related to the accountability of the individuals who either directly work for, or indirectly support the firm (for example employees and customers). The notion of earning power implicates that the value of goodwill, as an intangible resource (efforts), is directly related to the firms' accomplishment (revenue). Reasoning as such, a measure of effort and a measure of accomplishment should be used to determine the value of goodwill. However, the definition applied by IASB to determining the initial value is dubious and is adhered with common sense reasoning. According to IFRS 3, the value of goodwill should arise from the deduction of purchase value from the fair values of the identified net assets. In this calculation two types of error measurements may emerge. One form of error arises from the notion of how we know that the purchase value is a fair value. Another form of error arises from the notion that the value of the initial value of goodwill is allowed to be decided as a residual after the reductions of the fair values of the identifiable tangible of intangible assets from the purchased value. How do we know that firms accurately calculate the fair values of the identified intangibles? Both errors emerge from the lack of normative guide-lines for the purpose of independent valuation procedures. Most (1977) puts clarity to the need of defining the initial value, independently, by suggesting the following definitions of goodwill (p. 241) Determining the value of goodwill as a theoretical construct differs from the value determined as an empirical observation. The former valuation approach gives the possibility for establishing the utility based valuation norms which are not dependable on the bargaining price used as a ground for the determination of the initial value over time. 4. DETERMINATION OF GOODWILL AS A THEORETICAL CONSTRUCT As we discussed earlier the meaning of goodwill value as the product of the empirical observation is essentially subjective. The price paid for the purchased entity is based on bargain and thus it is not reliable for bookkeeping. In order to increase the reliability of the initial value we use the Fisherian theory of capital and income which is based on the notion of cash-flow. The argument for this choice is that goodwill arises from the management expectation of super value in the future and that such value should be determined independently (theoretically) de-coupled from management subjectivity. In place of cash flow, we suggest that a measure of sustainable income--preferably sustainable value added income--be used as a ground for the computation of the theoretical value of goodwill. The following formula helps present the rules of calculation: V = SNI/r V is the theoretical value of the purchased firm. SNI is a measure of sustainable net profit based preferably on the weighted average of the purchased company's net incomes of the several periods. The discounting rate of interest, r, can be calculated from the basis of the parent company's operational performances, reflected in the key ratios drawn from the division of the parent company's sustainable net income with the average of the total assets involved in operation. By means of this formula the initial value of the purchased company can be normatively established and compared with the managerial bargaining price. This means that the error of the exchange value can be corrected and any excess payment that is beyond the threshold of the theoretical value can be directly recognized as the period expense. Since expectations of the superior value (accomplishments) of the goodwill would be materialized periodically, its costs (efforts) need to be matched periodically. 5. CONCLUSION This study presented four different but controversial practices of goodwill accounting and showed that none of these practices were theoretically justified. In particular, regulators of goodwill accounting failed to include objectivity, prudence, materiality and accrual accounting principles to build up an acceptable bookkeeping structure. Each regulatory approach became superseded by another approach in terms of common sense reasoning and the pursuance of portraying goodwill assets as an ephemeral and non-explanatory phenomenon. Presenting goodwill as such, legitimated that the role of accounting principles in valuation be replaced with managerial perspective of valuation. By means of examples we could show that common sense reasoning in goodwill accounting has resulted in paradoxes, contradictions, controversies, and incoherencies in the presentation of the operative value of goodwill by accounts. The common sense arguments were repeatedly used to motivate the acceptance of the new method and the discrediting of the previous method. Since, common sense goodwill explanation betrays its own inadequacy by its incoherencies, its contradictions and its paradoxes, practices of goodwill accounting remained historically controversial. But an account of the phenomena of goodwill which finally proves to be incoherent or non-explanatory constitutes an unsatisfactory foundation for accounting. That is why we argued in favor of the theoretical construct of goodwill, the one which may help regulate goodwill from the basis of its initial value. The limited objective of presenting this formula is not to gain a kind of hypothetical sympathy; it is rather aimed to reach a revival of the critical attitude, as far as possible, towards the state of mind for abandoning opinions which has hitherto held the common sense discourse of goodwill accounting pursuant. We modified Fisherian's formula for the context of goodwill accounting and explained that this formula may help opening up a debate upon valuation and procedures needed in the regulation of goodwill for business. Our modification is based on the assumptions that there is a possibility that the value presentation of goodwill be regulated retrospectively; the "true value" is only accessible after the fact. Accounting regulators should necessarily "lives in" and deal with, the culture of modern business one perpetually suspended in contemporaniety; according to some, a state of over-stimulated amnesia. Living in such business culture, one is incapable of imagining any future achievements except another version of the present. More to the points concerning the inquiry of goodwill accounting, the debate of valuation needs to be associated with the historical facts (data) and the kind of facts that accounting constructs contemporarily, rather than the facts that managers pursue to construct prospectively. The weakness of the current IASB's standards is that these standards pursue the purpose of mapping the "managers" imaginations of the "future achievements" rather than for the purpose of mapping the historical and contemporary "facts" that surround value continuity and discontinuity of goodwill. REFERENCES: Carlin, T.M, Finch, N. and Laili, H. 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(1940), An Introduction to Corporate Accounting Standards, American Accounting Association. Riahi-Belkaoui, A. (2004), Theory, fifth edition, Thomson. Seetharaman, A., Balachandran, M. and Saravanan, A.S. (2004), "Accounting treatment of goodwill: yesterday, today and tomorrow", Journal of Intellectual Capital, Vol. 5, No. 1, pp. 131-152. Tollington, T. (1998), "Separating the brand asset from the goodwill asset", Journal of Product and Brand Management, Vol. 7, No. 4, pp. 291304. Watts, R. (2003), "Conservatism in Accounting Part 1: Explanations and Implications", Accounting Horizons, Vol. 17, pp. 207-221. Wines, G., Dagwell, R. and Windsor, C. (2007), "Implications of the IFRS goodwill accounting treatment", Managerial Auditing Journal, Vol. 22, No. 9. Hossein Pashang, University of Boras, Sweden Glenn Fihn, University of Boras, Sweden Dr. Hossein Pashang received his Ph.D. at Gothenburg University, Gothenburg in 2003. Currently he is employed as an assistant professor in accounting at the University of Boras. His research areas include accounting for intangible assets. Dr. Glenn Fihn received his Ph.D. at Gothenburg University, Gothenburg in 2005. Currently he is employed as an assistant professor in accounting at the University of Boras. Company P 120 000 market value (price paid) Company T 60 000 book value Difference 60 000 USD
A theoretical construct: the present value of expected future profits, or net income in access of the normal return on investments. An empirical observation: the excess of the price paid for a business over the fair market value of its net assets excluding goodwill. An accounting technicality: on consolidating the accounts of a group, the excess of the amount paid by the parent for its holding over the parent's share of the net assets of the subsidiary. Gale Copyright:
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Understanding of the phenomena of goodwill.
Abstract:
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