Accounting treatment of goodwill: yesterday, today and tomorrow. Problems and prospects in the international perspective
| Pages | 131-152 |
| DOI | https://doi.org/10.1108/14691930410512969 |
| Published date | 01 March 2004 |
| Date | 01 March 2004 |
| Author | A. Seetharaman,M. Balachandran,A.S. Saravanan |
| Subject Matter | Accounting & finance,HR & organizational behaviour,Information & knowledge management |
Accounting treatment of
goodwill: yesterday,
today and tomorrow
Problems and prospects in the
international perspective
A. Seetharaman, M. Balachandran and A.S. Saravanan
Faculty of Management, Multimedia University, Cyber Jaya, Malaysia
Keywords Goodwill accounting, International accounting, Standards
Abstract The issue of goodwill has been debated in many countries throughout the world. Despite
numerous efforts and the existence of accounting standards and exposure drafts issued by various
professional bodies internationally, there is yet to be a universally accepted accounting treatment
for goodwill. The opinion on this subject differs and changes frequently. The dichotomy of having
to preserve prescribed recognition criteria on the one hand and the need to report useful
information on the other has led to the many controversial issues debated on the subject of
goodwill. This study centres around the international accounting treatment of goodwill in the past,
present and future. This study reviewed some of the issues that surrounded the accounting for
goodwill where it was found that goodwill accounting had faced many problems. Besides problems,
this project also looks into the prospect of the accounting for goodwill in the cyberspace era and
emergence of the knowledge-based economy. This study confirms that controversy remains
internationally with no solution in sight in the foreseeable future internationally.
Introduction
Among the major accounting problems yet to be solved, accounting for
goodwill looks very special when compared to other priority items. First, it is
the most controversial issue. Second, it is one of those rare intangibles that
managers are trying to wheedle into the balance sheet in spite of accountants’
best efforts. Thus the question that inevitably comes to mind is “Why are
accountants so fearful of goodwill and more generally of all kinds of
intangibles?” (Jean, 1990).
The laissez-faire attitude to goodwill accounting over the past five years has
therefore encouraged companies to select the treatments which give the most
favourable results. These abuses have been well documented and include
(Woolf, 1990):
.Allocating low values to acquired assets and a correspondingly high
value to goodwill; writing off goodwill against reserves and enjoying low
future depreciation charges on acquired assets.
.Inflating goodwill still further with a provision for future rationalisation
costs; writing off future revenue costs against the provision (rather than
The Emerald Research Register for this journal is available at The current issue and full text archive of this journal is available at
www.emeraldinsight.com/researchregister www.emeraldinsight.com/1469-1930.htm
Accounting
treatment of
goodwill
131
Journal of Intellectual Capital
Vol. 5 No. 1,
pp. 131-152
qEmerald Group Publishing Limited
1469-1930
DOI 10.1108/14691930410512969
profits), and writing back to profit and loss account any part of the
original provision now regarded as excessive.
.Obtaining the court’s permission to write off goodwill against share
premium account.
.Writing off goodwill against nothing at all, creating a negative “goodwill
write-off reserve” which can linger indefinitely as a dangling debit,
leaving other reserves and earnings intact.
.Writing off goodwill against revaluation reserve (which is now prohibited
in some countries).
.Since SSAP 22 applies only to goodwill, finding an alternative epithet to
describe acquired intangibles, and applying wholly different write-off
criteria – hence the popularity of brands, titles, concessions, licences,
trademarks, to name a few.
.Adopting merger accounting, if the necessary criteria are satisfied – and
avoiding the creation of both goodwill and share premium.
.Using acquisition accounting and taking advantage legal provisions.
Instead of a share premium account, creating a merger reserve which has
a variety of uses, including scope for the write-off of goodwill on future
acquisitions.
.Amortising goodwill “systematically” by means of an accounting policy
ensures minimal impact on current and foreseeable earnings (such as
annual write-off proportions based on reverse “sum-of-the-digits”).
The issue of goodwill has been very controversial and seriously debated by
academic and practising accountants all over the world today. A generally
accepted definition of goodwill is yet to be identified. Different countries have
different types of treatment for goodwill and there is not a standard that can
provide a basic harmonisation in the area of accounting for goodwill. One view
was in favour writing goodwill off immediately against reserves in line with
the prudence concept. The opposing view was that of amortising goodwill over
useful economic life in line with the accruals concept. A third view was to keep
the goodwill permanently with no full write off or no amortisation. Therefore
this represents the climate for the debate on “Accounting for Goodwill”.
This research is carried out to give a detailed understanding of the
accounting method for goodwill. Here, we will look into the definition of the
nature of goodwill and development of goodwill accounting in different
countries; investigate the principal controversy of systematic write-down of
goodwill versus immediate write-off of goodwill; distinguish between
internally generated goodwill and purchased goodwill; and provide
observations on the general accounting treatment of goodwill in different
countries.
JIC
5,1
132
To continue reading
Request your trial