Switch to IAS/IFRS: The Challenge presented by Goodwill
As the months go by, European listed companies are discovering the upheavals involved in implementing IAS/IFRS from the FY 2005. The controversy surrounding IAS 39 (recognising and measuring financial instruments) has been a case of missing the forest for the trees; although there is no doubt that this standard is likely to have a major impact on companies in the financial sector, other IAS/IFRS standards are likely to impact just as much on the balance sheets of large industrial or retail groups. For example, there is IAS 22 (business combinations) and IAS 36 (impairment of assets) which will completely overhaul the way goodwill is treated – depreciation is replaced with the impairment test, which means a strict definition of a model for valuing assets acquired, which will make it possible to monitor the assets over several years. Both standards issue a series of recommendations, for the most part indicative, certain aspects of which may be somewhat baffling to valuation experts, but which most importantly are likely to usher in significant changes in the relationship between a company and its auditors.
The aim of this study was to analyse the scope of the methodology recommended by these two standards in terms of valuation, and the implications of the imminent introduction thereof for the various actors involved (finance and accounts department within companies, auditors, market authorities, financial analysts, etc.) and their relationships with each other. To this end, a critical review of the relevant peer-reviewed, scholarly and organizational literature concerning how things have changed for listed European companies now that they must disclose their financial statements according to international financial reporting standards, with special emphasis on goodwill, is followed by a summary of the research and salient findings in the conclusion.
Review and Discussion
Background and Overview.
In recent years, policymakers at all levels of the European Commission have encountered some unexpected and costly problems in their efforts to achieve convergence and harmony across the board. In this regard, Radig and Loudermilk (1998) reported early on that, “Business expansion beyond national boundaries is widespread today, and companies must function in countries where cultures and laws are different from our own. There is a need for uniformity in accounting principles used within multinational companies” (22). To this end, the International Accounting Standards Committee (IASC) was created in 1973 to achieve this goal, but the organization has encountered problems based on nationalistic pride and preference, different models in place and a dearth of authority when dealing with governmental bodies (Radig and Loudermilk 22).
Likewise, in her study, “Large Firms Envision Worldwide Convergence of Standards,” Street (2002) reports that, “Currently, the largest accounting firms’ are working diligently in conjunction with their partners in the International Forum on Accountancy Development (IFAD) to achieve their vision of raising national accounting and auditing standards worldwide to meet or exceed internationally recognized benchmarks. An awareness of the ongoing activities of the firms and their IFAD partners to improve financial reporting, accountability, and transparency worldwide is crucial if other members of the accounting community, including educators, are to support and, more importantly, actively participate in these efforts” (215).
The IFAD was created in 1999 based on.”.. The premise that the expertise of the accounting profession and the financial resources of the World Bank and other international financial institutions when combined… could be harnessed in the interests of enhancing accounting capacity and capabilities in developing and emerging nations” (Street 214). Over time, IFAD’s objectives were expanded to include common global issues as well, and today, more than 30 international institutions, including:
The International Monetary Fund (IMF), International Federation of Accountants (IFAC);
The International Accounting Standards Board (IASB);
The International Organization of Securities Commissions (IOSCO);
The Organization for Economic Cooperation and Development (OECD); and,
The International Association for Accounting Education and Research (IAAER) (Street 215).
All of these organizations and agencies are collaborating with the member firms to support reform programs intended to improve the quality of financial reporting and auditing around the world (Street 215). The large firms and their partners agree that a framework for reforms in individual countries involves three steps:
Determine the standards that should apply;
Assess the extent to which the standards have been adopted and arrangements for ensuring compliance; and,
Implement an action plan to address identified gaps in performance (Street 215).
The large firms’ “Vision” holds that “all general purpose financial information must be prepared using a single world-wide framework using common measurement criteria and fair and comprehensive disclosure.” The Vision asserts that the national standards of many countries should be raised with the IASB’s International Accounting Standards (IAS)/International Financial Reporting Standards (IFRS) and IFAC’s International Standards of Auditing (ISA) serving as the benchmarks. In addition, the Vision emphasizes the importance of implementing IFAC’s new global ethics standards and the significance of other issues that must be addressed if change is to materialize; these initiatives include (a) corporate governance, (b) financial accountability and reporting laws, and – education. In addition, the Vision concerns all countries, all companies, and all accountants and auditors (Street 215).
During this effort, the firms and their partners have also been actively addressing the need and manner for compliance with international standards. Analyses by Cairns (1999) and a study by Street and Gray (2001) identified instances of companies that claimed to have prepared IAS financials that clearly diverge from IAS in some cases. To address this issue, effective for 1999-year-end financial statements, the IASB revised IAS No. 1 to require that “financial statements should not be described as complying with International Accounting Standards unless they comply with all the requirements of each applicable standard.” Additionally, the large firms have worked with IFAC to launch the Forum of Firms, an organization of international firms that perform audits of financial statements that may be used across national borders. Members agree to several requirements, including undergoing a global independent quality review. Commitment to all the obligations of membership contributes to raising the standards of the international practice of auditing (Street 216).
To further address compliance, the large firms are developing training programs, and several are proceeding on the premise that staff must pass an internal test before working on audits of IAS/IFRS financial statements. Additionally, the large firms are initiating quality controls for IAS/IFRS audits. These are similar to controls developed several years ago for non-U.S. companies that report according to U.S. GAAP, as compliance problems also initially existed here. Currently, there are fewer compliance problems as the quality control system requires reviews by U.S. GAAP experts. In combination with ongoing efforts to raise auditing standards in all countries to the international benchmark, the new quality control reviews should yield the same improvement for IAS/IFRS companies. Commenting on the efforts of the large firms, IASB Chairman Sir David Tweedie stated: “The IASB’s objective of having one single set of high-quality global standards to meet the worldwide aim of comprehensible, transparent and reliable financial statements would be rendered pointless if the auditing firms did not apply rigorous, high-quality global auditing standards to ensure that a fair presentation is given in these statements” (quoted in Street at 216).
The Challenge Presented by Goodwill.
While “goodwill” may appear to be an ephemeral and nebulous concept, there are some definitions and tests available to help place a dollar figure on it. According to Black’s Law Dictionary (1990), goodwill is, “The favor which the management of a business wins from the public. The favorable consideration shown by the purchasing public to goods or services known to emanate from a particular source…. The excess of cost of an acquired firm or operating unit over the current or fair market value of net assets of the acquired unit. Informally used to indicate the value of good customer relations” (694). By contrast, the term “consolidated goodwill” is used to refer to the difference between the fair value of the consideration given by an acquiring company when buying a business and the aggregate of the fair values of the separable net assets acquired; in this regard goodwill is generally a positive amount that should be eliminated by writing it off immediately to the reserves or alternatively by amortization to the profit and loss account over its useful life, to comply with “Statement of Standard Accounting Practice 22, Accounting for Goodwill” (Pallister et al. 118).
In addition, the term “purchased goodwill” is used to describe the difference between the fair value of the price paid for a business and the aggregate of the fair values of its separable net assets. According to Butler, Butler and Isaacs (1997), purchased goodwill.”.. may be written off to reserves or recognized as an intangible asset in the balance sheet and written off by amortization to the profit and loss account over its useful economic life. Internally generated goodwill should not be recognized in the financial statements of an organization. The treatment of goodwill is governed by ‘Statement of Standard Accounting Practice 22, Accounting for Goodwill'” (157). In their essay, “Accounting for Goodwill: Are We Better Off?,” Massoud and Raiborn (2003) report that:
Traditionally, purchased goodwill was capitalized (either in the investment account or as a separate intangible) and amortized over a period not to exceed 40 years. Some mergers and acquisitions (M&as) did not generate any goodwill because they were accounted for using the pooling-of-interests method. In 1969, Leonard M. Savoie (then Executive Vice President of the AICPA) stated that he expected the then-prevailing accounting pronouncement authority, the Accounting Principles Board (APB), to abolish the pooling of interests method. However, the death-knell for this accounting method was not sounded until 2001 with the issuance of SEAS No. 141. Thereafter, whenever the purchase price of an acquisition exceeds the fair market value of the acquired company’s net assets, the assignment of cost to goodwill is mandatory. (26)
According to Hake (2004), although the presence of goodwill on a balance sheet represents an expectation of higher profit, there is a cost associated with its accumulation: “Because goodwill is currently treated as a nonregenerating asset, accounting practice requires that it be removed from the balance sheet as it depreciates. The consequent depreciation of goodwill results in a direct charge against a firm’s annual earnings. Given the difficulties in measuring goodwill, recent practice has been a straight-line amortization over a maximum forty-year horizon” (Hake 389). This author and others reviewed suggest that it is reasonable to assume that most observers would agree that goodwill is unlikely to depreciate as predictably as hard goods; however, this precept has previously been accepted as a viable solution to the problem of accounting for goodwill. In sum, “According to this logic, goodwill doesn’t last forever, and it doesn’t evaporate immediately upon acquisition” (Hake 389). According to Hake, an alternative to the earnings drain of goodwill is the pooling method of acquisition: “By merging the two firm’s balance sheets, there is no recording of the acquisition price minus the target’s numerable assets. The effect is no recording of goodwill, no drain on earnings. This practice was most common among firms with high market valuations relative to tangible assets (e.g., three MBAs and a laptop) because the charges needed to depreciate goodwill would be ruinous to earnings” (390).
A comparison of how goodwill is treated by the U.S. And several European countries is provided in Table 1 below.
Table 1.
Comparison of International Goodwill Treatments.
Country
Amortization
Period of Time
United States
Canada
Life with maximum of 20 years
United Kingdom
Life with maximum of 20 years
Germany under HGB, maximum life is 15 years; coder DRS only amortization over a maximumof 20 years
IASB
Life with maximum of 10 years; rebuttal presumption to 20 years
Source: Massoud and Raiborn 27.
Table 2.
Comparison of International Goodwill Treatments for Impairment.
Country
Impairment
United States
Yes: review annually and write off where necessary
Canada
Impairment review exception included
United Kingdom
Impairment review exception included
Germany
HGB (German Commercial Code) requires an annual impairment test; it is currently unclear whether the DRS (German Accounting Standard) is entitled to eliminate legal options
IASB
Impairment review exception included
Source: Massoud and Raiborn 27.
Although discussions of accounting for purchased goodwill are certainly not now, they have assumed some new importance and relevance in recent years (and months) as the march towards international convergence in accounting continues. For example, in his chapter, “New Accounting for Goodwill: Application of American Criteria from a German Perspective,” von Colbe (2004) reports that the Financial Accounting Standards Board (FASB) published its revised exposure draft on accounting for business combinations and intangible assets in February 2001, followed on June 29, 2001, by Statement of Financial Accounting Standards (SFAS) 141 “Business Combinations” and SFAS 142 “Goodwill and other intangible assets” (201). The introduction of these new standards meant that the FASB eliminated the pooling-of-interests method of acquisition accounting and substituted the so-called impairment-only approach to goodwill accounting for the previously mandatory amortization of this intangible asset (von Colbe 201). The new standards resulted in heated controversy in Germany concerning the compatibility of the impairment-only approach to goodwill arising in acquisitions with traditional rules and legal regulations of accounting and on its usefulness for investor decision-making (von Colbe 201).
A few months later, the German Accounting Standards Board (GASB), the German standard-setting body, promulgated its exposure draft No. 1a on the compatibility of SFAS 141 and 142 with accounting directives, issued by the European Economic Community (EEC); at that time, the GASB announced that despite of the fact that EEC directives require amortization of goodwill within four years following the acquisition or over its useful life, group accounts prepared according to internationally accepted accounting standards, including SFAS 141 and 142, were deemed consistent with the EEC directives (von Colbe 201).
The GASB maintained that, according to Section 292a HGB (Handelsgesetzbuch, the German commercial code that regulates accounting standards), listed corporations following U.S. Generally Accepted Accounting Principles (GAAP) were exempt from the obligation to set up group accounts in accordance with the regulations of the HGB (von Colbe 201). In their comments on exposure draft No. 1a, the majority of accounting academics denied its compatibility with the EEC directives and with German law, and questioned the usefulness of the impairment-only approach (vol Colbe notes that these comments are publicly available at (www.drsc.de.)(202).
Although some firms and professional associations were in favor of the proposals, others were skeptical concerning its legitimacy and the usefulness of the proposed approach to goodwill accounting; by contrast, von Colbe notes that the German Institute of Chartered Accountants (IdW) did not comment on this issue, but in the organization’s comment on the FASB’s revised exposure draft it had expressed.”.. doubts whether the requirement not to amortize purchased goodwill can be based upon the argument that goodwill — “in its entirety or to a large extent — “is not a wasting asset” (2001: 164). Simultaneously, the GASB’s standard No. 1a had been promulgated and affirmed by the German Ministry of Justice; as a result, von Colbe suggests that according to 342 HGB, it can be assumed that standard No. 1a is part of German generally accepted group accounting principles today (202).
In this regard, von Colbe cites Pellens and Sellhorn who found that some German parent companies, especially those listed at the NYSE and approximately 50% of those listed at the Frankfurt exchange’s “Neuer Markt” segment, prepare their group accounts according to U.S. GAAP, in application of Section 292a HGB (Pellens and Sellhorn 2001: 1681-9); it is quite likely, though, that the International Accounting Standards Board (IASB) and the British ASB will to some extent follow the example of FASB by banning goodwill amortization in the future (von Colbe 201). According to this author, “When we observe the frequent changes made to goodwill accounting rules in the United Kingdom (and not only there), we can conclude: ‘If history is any guide, [the impairment only approach] is likely to last for a few years until its shortcomings are demonstrated by some future accounting scandal. At that point, whoever is setting standards at the time will no doubt revert to one of the previous treatments of goodwill. And so the wheel will continue to turn'” (Paterson 2002: 101 in von Colbe at 201).
IAS 39 (Recognising and Measuring Financial Instruments).
According to the financial analysts at Deloitte, Touche and Tohmatsu (2007), IAS 39 applies to all types of financial instruments, except for the following (IAS 39.2):
Interests in subsidiaries, associates, and joint ventures accounted for under IAS 27, IAS 28, or IAS 31; however IASs 32 and 39 apply in cases where under IAS 27, IAS 28, or IAS 31 such interests are to be accounted for under IAS 39 – for example, derivatives on an interest in a subsidiary, associate, or joint venture;
Employers’ rights and obligations under employee benefit plans to which IAS 19 applies;
Contracts for contingent consideration in a business combination;
Rights and obligations under insurance contracts, except IAS 39 does apply to financial instruments that take the form of an insurance (or reinsurance) contract but that principally involve the transfer of financial risks and derivatives embedded in insurance contracts;
Financial instruments that meet the definition of own equity under IAS 32.
Important definitions in IAS 39 are provided in Table 3 below.
Table 3.
Important Definitions in IAS 39.9.
Term
Definition
Financial instrument contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity
Financial asset
Any asset that is: cash; an equity instrument of another entity; a contractual right: to receive cash or another financial asset from another entity; or to exchange financial assets or financial liabilities with another entity under conditions that are potentially favourable to the entity; or a contract that will or may be settled in the entity’s own equity instruments and is: a non-derivative for which the entity is or may be obliged to receive a variable number of the entity’s own equity instruments; or a derivative that will or may be settled other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of the entity’s own equity instruments. For this purpose the entity’s own equity instruments do not include instruments that are themselves contracts for the future receipt or delivery of the entity’s own equity instruments.
Financial liability:
Any liability that is: a contractual obligation: to deliver cash or another financial asset to another entity; or to exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavourable to the entity; or a contract that will or may be settled in the entity’s own equity instruments.
Source: IAS 39 Summary, Deloitte, Touche and Tohmatsu, 2007.
According to Leuz, Pfaff, and Hopwood (2004), “The real problem for European global players was access to the U.S. capital market. A solution could consist in obtaining an agreement with the United States on the mutual recognition of financial statements. Attempts made by the Commission very quickly showed that there was little interest in the United States for such an initiative. Financial statements prepared by U.S. companies under U.S. GAAP were in fact already recognized in all member states” (355). The reverse, though, was not true in the United States for financial statements that were prepared by European companies in accordance with the Accounting Directives; in addition, the Directives did not provide a sufficiently comprehensive set of standards to meet U.S. requirements (Luez et al. 355). Moreover, there were also important differences between member states because of the many options included in the Directives (Leuz et al. 355).
For example, according to Leuz et al.:
In developing a new accounting strategy, the Commission paid particular attention to respecting the principles of subsidiarity and proportionality set out in the Maastricht Treaty. The Commission wished to avoid as far as possible new legislation, or amendments to existing legislation, at the EU level. The Commission saw no need to develop European standards for the sake of having European standards when other solutions were equally satisfactory. It was also clear that a more flexible framework was needed, one that could respond rapidly to current and future developments. Unless the framework adopted at the European level could be changed without too many difficulties, there was a risk that the solutions adopted would be set in stone. If these solutions no longer corresponded with today’s needs, it would be difficult to justify their existence. Clearly, it was important that the proposed approach provide legal certainty and that it would ensure respect for Community law (357).
From the Commission’s perspective, producing two completely different sets of financial statements would not only be prohibitively costly, it would also be confusing; in addition – and perhaps just as importantly — the publication of different figures for different purposes would not provide investors with the confidence needed to make informed decisions based on the published financial information. As a result, Leuz and his associates emphasize that this issue was a very high priority for European companies so they could satisfy differing requirements by producing just one set of financial statements (357).
Therefore, when the Council of Ministers announced their support of the Commission’s proposed new accounting strategy, two conditions were stipulated:
If the EU was to accept IAS as the preferred set of accounting standards to be applied in consolidated accounts of global players, then the EU must have an increased involvement in the work of the IASC. Therefore, the Commission was granted an observer seat on the Board of the IASC and on the Standards Interpretations Committee (SIC). The Commission was also invited to participate in a number of steering committees.
The preparation of consolidated financial statements using IAS was only possible to the extent that there were no conflicts between IAS and the Accounting Directives (Leuz et al. 359).
Based on the foregoing stipulations, Leuz and his colleagues suggest that it was important for the Commission to examine with member states to what extent conflicts existed; to this end, a task force was established consisting of experts from the Commission and member states which concluded: “There were no major conflicts between IAS and the Accounting Directives. As a result, it was possible for a European company to prepare its consolidated accounts in conformity with IAS without being in conflict with the Accounting Directives” (360). The fact that there were no major conflicts between IAS and the Accounting Directives did not mean that there were no conflicts with national law. The Accounting Directives contained a significant number of alternatives, and it was entirely possible for member states to have elected options that were not allowed under IAS; likewise, it was presumed that in those cases in which the Accounting Directives allowed for an option to companies, the latter would apply the option that conformed with IAS (Leuz et al. 260).
The Commission also emphasized that it would be amenable to changes in the Accounting Directives where such changes were deemed necessary, especially when such changes would avoid conflicts with IAS. It was for this reason that the Commission proposed an amendment to the Accounting Directives in February 2000 that allowed for certain financial assets and liabilities to be valued at fair value, in accordance with IAS 39, “Financial instruments: Recognition and measurement.” In this regard, Leuz and his colleagues report that this proposal was adopted by Council and Parliament on September 27, 2001. Following the Commission’s recommendation in the 1995 Communication, seven member states (Austria, Belgium, Finland, France, Germany, Italy, and Luxembourg) also adopted legislation or measures that permitted listed companies to depart from the national rules on consolidation and to prepare their consolidated financial statements in accordance with IAS (and U.S. GAAP) (Leuz et al. 361).
IAS 22 (Business Combinations).
According to Deloitte, Touche and Tohmatsu (2007), the objective of IAS 22 (Revised 1993) is to prescribe the accounting treatment for business combinations; IAS 22 covers both an acquisition of one enterprise by another (an acquisition) and also the rare situation where an acquirer cannot be identified (a uniting of interests). Some key definitions under IAS 22.8 are provided in Table 4 below:
Table 4.
Important Definitions under IAS 22.8.
Term
Definition
Business combination
Combining two separate enterprises into a single economic entity as a result of one enterprise uniting with or obtaining control over the net assets and operations of another enterprise. The combination can result in a single legal entity or two separate legal entities.
Acquisition business combination in which one of the enterprises, the acquirer, obtains control over the net assets and operations of another enterprise, the acquiree, in exchange for the transfer of assets, incurrence of a liability or issue of equity.
Uniting of interests business combination in which the shareholders of the combining enterprises combine control over the whole, or effectively the whole, of their net assets and operations to achieve a continuing mutual sharing in the risks and benefits attaching to the combined entity such that neither party can be identified as the acquirer. Also called a pooling of interests.
Control
The power to govern the financial and operating policies of an enterprise so as to obtain benefits from its activities. If one enterprise controls another, the controlling enterprise is called the parent and the controlled enterprise is called the subsidiary.
Source: IAS 22 Summary, Deloitte, Touche and Tohmatsu (2007).
In this area as well, there remain some important differences that contribute to the current dichotomy of accounting for goodwill. For example, in their study, “Goodwill Impairment: Convergence Not Yet Achieved,” Shoaf and Zaldivar (2005) report that the International Accounting Standards Board (IASB) and the U.S. Financial Accounting Standards Board (FASB) have agreed to work separately and jointly toward convergence of accounting standards; in spite of recent convergence activities, though, significant differences remain between U.S. And international standards in accounting for impairment of goodwill and other intangible assets which are not currently scheduled for resolution (31).
Over the past several years, there has been a growing movement that continues to gain speed that is fueling the drive toward a single set of accounting standards that would be accepted in financial markets around the world. This movement has been characterized by the endorsement of International Financial Reporting Standards (IFRSs or IFRS)’ for stock trading by the International Organization of Securities Commissions (IOSCO); the reorganization of the International Accounting Committee (IASC) into a more representative and aggressive body, called the International Accounting Standards Board (IASB), with direct links to primary national policymakers (Shoaf and Zaldivar 32). The movement has also witnessed the formal agreement of the IASB and the U.S. Financial Accounting Standards Board (FASB) to work, separately and jointly, toward convergence of accounting standards; and, perhaps most importantly, the adoption by the European Union (EU) of the IASB’s IFRSs for reporting by public companies, beginning January 1, 2005 (Shoaf and Zaldivar 32). By that time, almost 7,000 public companies in the 25 EU countries were required to use IFRS for the first time in 2005 instead of their own national standards; as a result, other countries (i.e., Australia) have determined to adopt IFRS as well, to the extent that the IASB expects that over 90 countries will be following IFRS by 2005 (Shoaf and Zaldivar 32).
To facilitate this widespread adoption of IFRS, the IASB established the goal of arriving at a “stable platform” of standards by March, 2004 to allow a sufficient amount of time for the converting companies to be able to assimilate the new standards for the 2005 financial reporting period; in this regard, the reporting constituents had voiced worries that the IASB was promulgating changes so rapidly that the standards would continue to be a difficult goal to achieve, a fact that would further complicate and confuse the transition. Consequently, the IASB determined that only standards issued by March 2004 would have implementation dates in 2005 in order for the “stable platform” of international standards to be effective (Shoaf and Zaldivar 32).
The transition was completed by January 1, 2005 (except for fine-tuning adjustments) with the issuance of IFRS 3, Business Combinations (IFRS 3); IFRS 4, Insurance Contracts (IFRS 4); IFRS 5, Non-current Assets Held for Sale and Discontinued Operations (IFRS 5); and the amendments to International Accounting Standards IAS 36, Impairment of Assets (IAS 36); IAS 38, Intangible Assets (IAS 38); and IAS 39, Financial Instruments: Recognition and Measurement Fair Value Hedge Accounting for a Portfolio Hedge of Interest Rate Risk (IAS 39) (Shoaf and Zaldivar 32).
The issuance of IFRS 3 completes only the first stage of the business combinations project, which remains an ongoing joint project of the FASB and the IASB; in addition, the rationale in support of consequential amendments to IAS 36 and IAS 38 was to incorporate the changes relating to business combinations made in IFRS 3 rather than to reconsider other existing requirements of IAS 36 and IAS 38 (Shoaf and Zaldivar 32). A number of the changes incorporated in IFRS 3 encourage convergence with U.S. Statement of Financial Accounting Standards 141, Business Combinations (SFAS 141) and SFAS 142, Goodwill and Other Intangible Assets (SFAS 142), including: adopting the exclusive use of the purchase method; recognition of more intangible assets, separate from goodwill, at fair value at the acquisition date; not amortizing goodwill and other intangible assets with indefinite lives but testing them for impairment; and the recognition of negative goodwill immediately in the income statement (Shoaf and Zaldivar 32). The amendments to IAS 36, though, do not achieve the desired convergence with U.S. generally accepted accounting principles (GAAP) that was anticipated in the Exposure Draft (ED 3) phases of the initiative; rather, they leave significant differences between U.S. And international standards in place which remain unscheduled for resolution (Shoaf and Zaldivar 32).
These authors emphasize that because goodwill amortization was eliminated in IFRS 3, the IASB felt that the impairment test in IAS 36 should be changed to take into account goodwill. The initial proposal offered by IASB included in ED3 was a two-step impairment test for goodwill that was comparable to the test required under SFAS 142; serious concerns emerged among IASB constituents, though, concerning the practicality and complexity of the proposed impairment test for goodwill (Shoaf and Zaldivar 32). In addition, there were still some constituents (including two members of the U.S. Financial Accounting Standards Board and some of the respondents to ED3), who remained opposed to the elimination of goodwill amortization, notwithstanding the convergence objective (Shoaf and Zaldivar 32).
Under the provisions of SFAS 142’s two-step impairment test, the fair value of goodwill in periods subsequent to the date of acquisition is estimated in the same manner as it was at the date of the acquisition:
The first step identifies a potential impairment by comparing the estimated fair value of a reporting unit to its carrying amount, including goodwill. If the fair value of the reporting unit is greater than its carrying amount, goodwill is not considered impaired, and the second step is not required. If the fair value of the reporting unit is less than its carrying amount, the second step of the impairment test must be performed to measure the amount of the impairment loss, if any.
In the second step, the estimated fair value of the reporting unit determined in Step 1 is allocated to all the assets and liabilities of that unit (including any unrecognized identifiable intangible assets). The excess of the estimated fair value over the amounts assigned to assets and liabilities is the new estimated (or implied) fair value of goodwill. If the carrying amount of goodwill exceeds its estimated fair value amount, an impairment loss is recognized equal to that excess and is reported as a charge to income from operations. The amounts determined in the new purchase price allocation are used for purposes of testing goodwill for impairment. That is, the entity would not record a “step-up” in net assets or any unrecognized intangible assets as a result of this process. Also, once written down for impairment, no future recovery of goodwill value may be recognized. (Shoaf and Zaldivar 32).
If an impairment test of goodwill and any other asset takes place simultaneously, the goodwill impairment test should take place after the other asset is tested for impairment. As an example, these authors note that if an asset group is being tested for impairment under SFAS 144, Accounting for the Impairment of Long-Lived Assets and for Obligations Associated with Disposal Activities, that asset group should be tested for impairment prior to conducting the two-step goodwill impairment test (Shoaf and Zaldivar 32).
The goodwill impairment test in IAS 36 is substantially different from that in SFAS 142 because the proposed changes to converge with U.S. principles were not adopted. To date, the European Financial Reporting Advisory Group (EFRAG) and other agencies have recommended eliminating the second step proposed in ED3 for testing goodwill impairment because they deemed it unnecessarily complex and prohibitively costly to implement. As a result, the IASB made the decision to retain the existing impairment testing approach in IAS 36 for measuring goodwill impairment, which, rather that testing goodwill for impairment through a direct method, requires the use of a residual approach (Shoaf and Zaldivar 32).
Under the provisions of IAS 36, goodwill acquired in a business combination should, from the acquisition date, be allocated by the acquirer to the lowest cash-generating units (CGU) or group of CGUs that are expected to benefit from the combination, which should be the level at which goodwill is to be monitored for internal management purposes for the purpose of impairment testing (Shoaf and Zaldivar 32). Minimum requirements in this regard mean that an entity is required to allocate and monitor goodwill at the segment level, based on either the primary or the secondary reporting format determined in accordance with IAS 14, Segment Reporting; however, the entity is not required to coincide with the legal entity approach at which goodwill may be allocated under IAS 21, the Effects of Changes in Foreign Exchange Rates, for the purpose of measuring foreign currency gains and losses, if goodwill is not monitored at that level (Shoaf and Zaldivar 32). The amendment also stipulates that goodwill should be carried at cost, not amortized, and, at least annually, an assessment should be made as to whether goodwill has been impaired in accordance with the procedure established in IAS 36 (Shoaf and Zaldivar 32).
To conduct an IAS 36 impairment test, the carrying amount of the CGU is compared with its recoverable amount. For this purpose, the recoverable amount is the higher of:
The fair value, less costs to sell, or,
Its value in use (Shoaf and Zaldivar 32).
As Shoaf and Zaldivar emphasize, though, if the first of the two values calculated is higher than the carrying amount, then clearly goodwill impairment does not exist, and the other value need not be determined. According to these authors, “It is expected that most entities will start the test by determining value in use, given the absence of an active market for most CGUs. While fair value may be estimated as the price that could be obtained for disposal in an arm’s length transaction between willing participants, it is unlikely that this information is readily available, and its determination might be costly” Shoaf and Zaldivar 32). By contrast, value in use can be determined from internal cash flow projections and the cash flow projections used in the valuation should be taken from the management-approved budgets and forecasts, generally for up to a maximum of the next five years, unless a longer period can be justified, and by extrapolating, using a steady or declining growth rate for subsequent periods (Shoaf and Zaldivar 32).
Cash flow projections, though, should relate to the CGU in its current condition; future uncommitted restructurings and expenditures to enhance performance should not be anticipated; the expected future cash flows are subsequently discounted to their net present value to determine value in use, using a discount rate that will include the risk-free rate adjusted by any risks specific to the CGU’s future unadjusted cash flow estimates (Shoaf and Zaldivar 32).
IAS 36 stipulates that the test is applied to the CGU as a whole; in those cases where the CGU’s carrying amount exceeds its recoverable amount, it must be recorded down to the recoverable value. In these cases, the goodwill of the CGU is recorded first; any additional impairment amount that may be required to be recognized once goodwill has been fully written off is allocated on a pro rata basis to the other assets within the CGU, provided that it does not reduce any asset below the higher of its fair value, less cost to sell, or value in use (Shoaf and Zaldivar 32). In other words, since the implementation of this residual method approach, once it has been determined that an impairment exists, if the amount of goodwill allocated to that CGU does not cover the difference between the recoverable amount and the carrying amount, the test requires allocation of the impairment to other assets as well, even though an indicator of impairment may not have existed for those same assets (Shoaf and Zaldivar 32).
Like SFAS 142, IFRS 3 also requires greater recognition of intangible assets other than goodwill in a business combination than IAS 22; it accomplishes this requirement through amendments to the definition and presumptions about the reliability of measurement. In addition, as with SFAS 142, these intangible assets may be considered to have indefinite lives if there is no foreseeable time limit to their future cash flows. In these instances, the intangible assets are not amortized, but are subject to impairment testing, such as goodwill. Although assets with finite lives are only tested if there are indications of impairment, goodwill and intangible assets with indefinite lives must still be tested for impairment at least once a year (Shoaf and Zaldivar 32). The impairment test for intangible assets is the same test as that applied to other assets under IAS 36; in other words, the carrying amount of the asset is compared with its recoverable amount, which is the higher of (a) the fair value, less costs to sell, or (b) its value in use (Shoaf and Zaldivar 32).
Impairment losses for intangible assets with indefinite lives, other than goodwill, may be reversed under IAS 36. If the impairment test indicates that there has been a recovery of value because the difference between carrying value and recoverable amount has decreased, the loss may be reversed, and the intangible asset written up. The increase to the carrying amount cannot exceed what the depreciated historical cost would have been if the impairment had not been recognized. Moreover, changes caused by unwinding of the discount may not be reversed. When indicated, the reversal of an impairment loss is recognized in the income statement. The reversal of impairment losses for goodwill is prohibited. (Shoaf and Zaldivar 32).
Despite the joint efforts of the IASB and the FASB to achieve convergence in accounting for business combinations and related goodwill and intangible assets, evidenced by the significant changes adopted by the IASB in the issuance of IFRS 3 and the amendments to IAS 36 and IAS 38, some major differences remain, especially in the treatment of asset impairment. Key areas of divergence in dealing with impairment are shown in Table 5 below.
Table 5.
Differences in Accounting for Impairment.
IASB (International)
FASB (U.S.)
Measure of impairment
Compare carrying value recoverable amount (the higher of the fair value in use and fair value less costs to seller.
Compare carrying value to fair value.
Level of testing for goodwill
CGU, the lowest level to which goodwill can be allocated and for which management monitors goodwill (monitoring should be at least at the segment level).
Reporting unit, either a business segment or one organizational level below.
Calculating impairment of goodwill
One step: compare recoverable amount of CGU it its carrying amount.
Two steps: (1) Compare fair value of the reporting unit with its carrying amount including goodwill. If FV is greater than carrying amount, no impairment (skip step 2); and (2) Compare implied FV of goodwill with carrying amount.
Calculating impairment of intangible assets
Goodwill and intangible assets with indefinite lives are not tested directly; the CGU, to which these assets have been allocated, is tested for impairment as a whole.
Goodwill and intangible assets are tested directly.
Reversal of impairment losses.
Applicable to all intangible assets, other than goodwill.
Always prohibited.
Source: Shoaf and Zaldivar 33.
The impairment testing models of the IASB and the FASB use differing bases, in the sense that the FASB compares the carrying value of an asset to its fair value, and the IASB compares its carrying value to the recoverable amount (an amount which includes value in use); this difference may be reduced if the FASB adopts its current Exposure Draft: Fair Value Measurement, since the draft incorporates a measure which is approximately equivalent to the IASB’s value in use; therefore, the adoption of this draft would promote convergence by eliminating some of the remaining differences between the IASB and FASB in accounting for impairment (Shoaf and Zaldivar 32).
The impairment testing models also differ in marked ways, though, with regard to the application of the test to goodwill and intangible assets with indefinite lives. For example, Shoaf and Zaldivar point out that the IASB retained the impairment test in IAS 36 for testing goodwill impairment, rejecting the FASB’s two-step test with the resulting impact that the IASB requires application of goodwill to a CGU, and only tests its impairment at the level of the CGU or group of CGUs, without computing the implied value of goodwill at the time of the test.
In this cases where impairment of the CGU is required, it is written down against goodwill first, and any remaining impairment, once goodwill is written off completely, is required to be applied on a pro rata basis to other long-lived assets in the CGU; by contrast, the FASB links goodwill with a reporting unit (which may be different in description from a CGU), and in those instances where impairment of the reporting unit is required, each of its assets is measured at fair value to calculate the implied value of goodwill before it is recorded (Shoaf and Zaldivar 32). These authors add that it may not even be necessary to write down goodwill if the impairment is determined to be caused by other assets in the reporting unit, for which a different impairment model applies (that is, the two-step approach in SFAS 144) (Shoaf and Zaldivar 32).
Finally, an importance difference continues to be in place with regards to the reversal of impairment losses; for instance, the FASB prohibits reversals entirely whereas the IASB allows impairment losses to be reversed, up to the amount of what the depreciated historical cost would have been without the impairment loss, except if caused by unwinding of the discount rate (Shoaf and Zaldivar). The FASB and IASB, though, have both agreed that reversals of goodwill impairment should not be allowed, but these other differences continue to represent significant challenges to achieving convergence: “They do not appear on the IASB’s agenda, but the IASB has asked the FASB to reconsider them during its deliberations on the Phase II of the Business Combinations Project” (Shoaf and Zaldivar 32).
Based on the foregoing, these authors conclude that with the recent pronouncements on business combinations, there has been an increase in the number of intangible assets with indefinite lives, including goodwill, that are not subject to amortization. Therefore, impairment testing has become increasingly important. Nevertheless, in spite of their collaborative efforts to converge on new accounting pronouncements, the IASB and the FASB still have significant differences in their impairment testing models (Shoaf and Zaldivar 32). The resolution of such fundamental differences and achieving convergence represent important goals for global capital markets. For the past several years, countries such as Australia, Germany and the United Kingdom have allowed foreign companies that issue securities in those countries to prepare their consolidated financial statements using the provisions outlined in IFRS; after January 1, 2005, though, listed companies domiciled in those and other EU countries are required to use IFRS (the primary countries that still do not accept IFRS without reconciliation are Canada, Japan and the U.S.) (Shoaf and Zaldivar 33). In addition, for a number of years, the U.S. Securities Exchange Commission (SEC) has recommended the convergence of IASB and FASB standards so that the current requirement to reconcile certain financial information by Foreign Private Issuers for financial statements that were prepared on a basis other than U.S. GAAP could be eliminated (Shoaf and Zaldivar 33). Based on the recent changes in the IASB and the EU adoption of IFRS, the SEC has reported that it will review the ongoing need for reconciliation after 2005 and the recommendations that emerge from that review will likely depend upon the extent of the convergence achieved to date (Shoaf and Zaldivar 33). During the review process, though, it is reasonable to expect that the SEC will encounter stiff political pressure from the EU and the possibility of a requirement for U.S. companies listed in the EU to reconcile to IFRS (Shoaf and Zaldivar 33). According to these authors, both the IASB and the FASB are in the second stage of the Business Combinations Project, which they are considering jointly; however, current developments on the project indicate that convergence in this area may not be accomplished in the short-term (Shoaf and Zaldivar 33).
IAS 36 (Impairment of Assets).
According to Deloitte, Touche and Tohmatsu (2007), the objective of IAS 36 is to ensure that assets are carried at no more than their recoverable amount, and to define how recoverable amount is calculated. In addition, in accordance with IAS 36:2, IAS 36 remains applicable to all assets except:
Inventories (see IAS 2);
Assets arising from construction contracts (see IAS 11);
Deferred tax assets (see IAS 12);
Assets arising from employee benefits (see IAS 19);
Financial assets (see IAS 39);
Investment property carried at fair value (see IAS 40);
Certain agricultural assets carried at fair value (see IAS 41);
Insurance contract assets (see IFRS 4);
Assets held for sale (see IFRS 5);
As a result, IAS 36 remains applicable to, among other assets, the following:
Land;
Buildings;
Machinery and equipment;
Investment property carried at cost;
Intangible assets;
Goodwill;
Investments in subsidiaries, associates, and joint ventures; and,
Assets carried at revalued amounts under IAS 16 and IAS 38 (Deloitte, Touche and Tohmatsu 5).
Important definitions from IAS 36.6 are provided in Table 6 below.
Table 6.
Important Definitions under IAS 36.6.
Term
Definition
Impairment
An asset is impaired when its carrying amount exceeds its recoverable amount.
Carrying amount
The amount at which an asset is recognised in the balance sheet after deducting accumulated depreciation and accumulated impairment losses
Recoverable amount
The higher of an asset’s fair value less costs to sell (sometimes called net selling price) and its value in use.
Fair value
The amount obtainable from the sale of an asset in a bargained transaction between knowledgeable, willing parties.
Value in use
The discounted present value of estimated future cash flows expected to arise from: the continuing use of an asset, and from its disposal at the end of its useful life.
Source: IAS 36 Summary, Deloitte, Touche and Tohmatsu (2007).
Some of the economic criteria that provide some structure to the ongoing debate on accounting for goodwill involve the specific question of whether the impairment-only approach or the traditional amortization approach is more appropriate for satisfying the investors’ information requirements; for this purpose, the following criteria are considered:
Relevance for the capital markets;
Reliability of the accounting numbers;
Verifiability;
Comparability;
Conservatism;
Consistency with generally accepted accounting principles (compatibility); and,
Suitability as a basis for dividend payout (von Colbe 201).
Except for the last two criteria, the FASB’s Statement of Financial Accounting Concepts (SFAC) No. 2 “Qualitative characteristics of accounting information.” also sets forth these characteristics. The appropriateness as a basis for dividend payout is a traditional criterion in Germany and some other Continental European countries as well; von Colbe notes that problems may result from the fact that the criteria are not regarded as being equally important in different countries, and that some of these characteristics may be in conflict with each other.
In its summary of standard No. 142, the FASB reported that, “Financial statement users… indicated that they did not regard goodwill amortization expense as being useful information in analyzing investments.” This assessment is based at least partly on a presentation to FASB on May 31, 2000 by a working group of representatives from Morgan Stanley Dean Witter, Goldman Sachs, Deloitte Touche Tohmatsu, PricewaterhouseCoopers, and Arthur Andersen. Trevor Harris of the Columbia Business School and Morgan Stanley Dean Witter led the discussion. The participants compared the goodwill amortization requirement with the impairment-only approach. Based on some empirical evidence and a theoretical model, they argued as follows:
In the sense of SFAC 2, relevance means ‘helping users to form predictions about outcomes of past, present and future events,’ especially for future earnings and cash flows. The group measured the relative forecast errors of earnings for two firms in their model over ten years. They found that on average, the error was smaller when purchased goodwill was not amortized but instead was accounted for under the impairment-only approach. Furthermore, the group reported that in the communications sector, analysts usually exclude goodwill when determining the companies’ value. Based on these findings the group concluded that the value relevance of accounting earnings for stock returns is greater when goodwill is not amortized because of higher forecast accuracy (Morgan Stanley Dean Witter et al. 2000:24).
A recapitulation of recent studies of goodwill amortization is provided in Table 7 below.
Table 7.
Recapitulation of Studies of Goodwill Amortization.
Author/Date/Title/Publication
Key Findings
Comments
Jennings, R., LeClere, M., and Thompson II, R. (2001). “Goodwill amortization and the usefulness of earnings,” Financial Analysts Journal, September/October: 20-8.
In this empirical study of about 500 publicly traded companies for 1993-8, using regressions of share price on per-share earnings before and after goodwill amortization, found the following results: “Even when disaggregated from the remainder of reported earnings, goodwill amortization provides no explanatory power for observed prices beyond that of earnings before goodwill amortization… The goodwill amortization component of reported earnings can best be viewed as a source of noise.”
Based on their findings, the authors concluded that, under the new rules of SFAS 142, banning goodwill amortization from the profit-and-loss statement would not reduce the usefulness of earnings, but might instead improve the information content of financial statements.
Brown, W.D., Tucker, K.J., and Pfeiffer, R.J. (1999). “A prospective look at the usefulness of separately reporting goodwill charges: An evaluation of ‘cash earnings.'” Working paper, University of Massachusetts, December 1999.
These researchers arrived at similar conclusions, identifying no evidence that stock prices of firms with high goodwill amortization are systematically lower than those of other firms.
Clinch, G. (1995). “Capital markets research and the goodwill debate,” Australian Accounting Review, June: 22-30, reprinted (1996) in Zeff, St. And Dharan, B. (eds.), Readings and Notes on Financial Accounting (New York: McGraw Hill), 340-50.
Earlier studies published in the mid-1990s were based on U.S. And U.K. data; the results on the association between share returns and differences in goodwill amortization are inconclusive. For example, in his review of this literature, this researcher concluded, “there is no clear association between reported amortization expense and share returns.
It is possible that goodwill amortization is of less importance to investors than other components of net income and any association is difficult to observe through the experimental noise in existing research” (342); in the alternative, goodwill may not be viewed an amortizable asset by investors.
Kr mling, M. (1998). “Der Goodwill aus der Kapitalkonsolidierung” (Frankfurt am Main: Peter Lang).
Author cites the paucity of empirical studies of the effects of goodwill amortization or of its exclusion from earnings on share prices; this analysis suggests that different goodwill amortization periods do not affect the extent of association of German firms’ equity and earnings with stock price.
As early as 1991 the German analysts’ association recommended that when computing earnings per share, analysts should eliminate goodwill amortization from reported earnings; however, the rationale used by DVFA/SG’s was to improve the comparability of the earnings per share of companies that charged purchased goodwill directly to equity with those companies that capitalized and amortized goodwill. The DVFA/SG did not explicitly address the value relevance issues. When purchased goodwill became more and more important, frequently exceeding firms’ equity, it became nearly impossible to charge goodwill directly to equity. In 2000, the DVFA/SG revised its recommendation and argued in favor of goodwill amortization over ten years as the standard procedure. In a recent comment on SFAS 142, DVFA/SG representatives argue that goodwill impairment losses reported in U.S. GAAP statements of German firms are to be regarded as part of operating income.
Although the foregoing studies suggest that investors on average do not feel that goodwill amortization contains relevant information, they do not directly show that an impairment-only approach is superior in that regard; von Colbe (2004) points out that the capital market reactions to goodwill impairment write-offs, particularly the association of goodwill values and earnings numbers generated under an impairment-only approach as contained in SFAS 142, have not been tested empirically to the degree required to draw general conclusions. A recapitulation of a number of recent studies in this regard is provided in Table 8 below.
Table 8.
Recapitulation of Studies Concerning Impairment-Only Approach.
Author/Date/Title/Publication
Key Findings
Comments
Francis, J., Hanna, D.J., and Vincent, L. (1996). “Causes and effects of discretionary asset write-offs.” Journal of Accounting Research, 34 (Supplement): 117-34.
This analysis of forty-four goodwill write-off announcements occurring between 1989 and 1992 found “no significant reaction to write-offs of goodwill.”
This finding is open to different interpretations: The authors point out that managers’ incentives “play a substantial role in explaining goodwill write-offs” (1996: 134), suggesting that the high degree of financial reporting discretion associated with these numbers leads to a reduced perception of credibility and information content. Alternatively, the write-offs, while possessing relevance to investors per se, might have been “old news” at the time they were announced, because they were preempted by other information.
Henning, S.L., Shaw, W.H., and Stock, T. (2002). “The amount and timing of goodwill write-offs and revaluations: Evidence from U.S. And U.K. firms.” Working paper, Southern Methodist University, July 2002.
Although these researchers found that goodwill write-offs appear to be timelier than under the predecessor regime in SFAS 121, they do not explicitly consider the capital market’s view of these charges.
This study performed is one of the first to analyze empirically goodwill write-offs under SFAS 142.
Jennings, R., LeClere, M., and Thompson II, R. (2001). “Goodwill amortization and the usefulness of earnings,” Financial Analysts Journal, September/October: 20-8.
These researchers identified “a negative association between equity values and goodwill amortization, after controlling for other components of expected earnings.”
They stress that this association is weak and exhibits substantial cross-sectional variation, suggesting that “investors may view purchased goodwill as an economic resource that does not decline in value for some firms.” They interpret this as support for an impairment-only approach to goodwill accounting that had at the time been under consideration by the Accounting Standards Board (ASB) in the United Kingdom.
According to von Colbe (2004), because the capital-market effects of the impairment-only approach have not yet been analyzed to a sufficient extent, further research is required concerning the relevance considerations on which the FASB has based its reversal on the traditional goodwill amortization; a final judgment on that approach, though, must be based on a thorough empirical investigation of the issues involved: “The effect of higher volatility of earnings and, possibly, of share prices caused by higher impairment losses should be taken into account” (von Colbe 205).
According to some analysts, “Accounting standards worldwide seem to be converging to the IAS book of rules. A cornerstone of these new accounting rules is fair value accounting, a true and fair evaluation of financial assets relying on the assessment of a secondary market. While this valuation principle is easy to apply for instruments that trade on an active secondary market, like stocks and bonds, it is much harder to apply to non-traded assets” (Krahnen and Schmidt 2004:512). For example, in the case of the corporate loan book, there is typically no secondary market for corporate loans; this is especially true for relationship loans because this type of lending involves private information. According to these authors, “This information, which is the source of value in the lending relationship, cannot easily be transmitted to third parties in a market place, due to conflicts of interest. Consequently, the market price of a financial asset subject to relationship specificity (like a bank loan in Germany) will not reflect the value of the relationship itself” (Krahnen and Schmidt 512).
The higher the value of private information in a relationship, in fact, the bigger the gap will be between the value of a claim in a bank’s loan book; e.g., its primary market price, and its secondary market value. Therefore, to the degree that relationship lending remains an important part of a financial institution’s activities is the degree to which the gap will actually be proportional to the franchise value of the bank (Krahnen and Schmidt 512). In a lending relationship, the more value that is added through private information and monitoring, the smaller is this loan’s fair market value relative to the expected value on the balance sheet; this means that if relationship lending matters, fair market values will be downward biased estimates of the expected value of the claims as seen by the lender (Krahnen and Schmidt 512). These are important considerations because fair market values tend to understate the value of a relationship loan, whereas they tend to state it correctly in the case of an arm’s length loan (such as a corporate bond).
Because relationship lending plays an important role in Germany (and possibly other European nations as well), the introduction of fair value accounting represents a potential threat. In this regard, Krahnen and Schmidt emphasize that, “The more involved they are in relationship affairs, the higher will be the requirement to write down asset values. It is, therefore, not surprising that financial institutions in countries with this type of system put up a fierce struggle against the introduction of these new accounting principles, as evidenced by the ongoing debate in Germany” (512).
These authors recommend that a superior approach would be to allow financial institutions to carry the difference between the nominal value of a claim and its fair market value as an asset (for example, to activate the wedge as a special goodwill asset), which would likely make fair value accounting acceptable even to the traditional accounting community; concomitantly, this approach would provide the market with an observable measure of relationship activities delivered by the intermediaries (Krahnen and Schmidt 512). This approach would mean that fair value accounting could represent an effective instrument for communicating to the market the actual value of relationship lending: “The transparency on relationship goodwill may well facilitate further investment in relationship management, rather than seeing it as a cost factor alone” (Krahnen and Schmidt 512). Likewise, as Massoud and Raiborn point out, past solutions may be perfectly viable in today’s dynamic environment, notwithstanding the constraints discussed above. For example, these authors report that, Accounting Research Bulletin (AEB) No. 24 (December 1944), “Accounting for Intangible Assets,” stated that intangibles either:
Had a limited life as dictated by law or their nature; or,
Did not have a limited life, which specifically included goodwill.
The latter type of intangible might “be carried continuously unless and until” it was reasonably evident that the life was limited or the items were worthless. “In retrospect,” Massoud and Raiborn note, “the profession had today’s goodwill answer over a half century ago” (26).
Conclusion
Complex problems require complex solutions, and the development of a standardized approach to accounting for goodwill among the international community is no exception. The research showed that accounting for goodwill has become a challenging endeavor for European-listed enterprises seeking to compete in the international marketplace and the recently promulgated provisions of the IAS have muddied rather than cleared the accounting waters from the perspective of many observers. The research also showed that it is more likely a matter of when than if that these issues will continue to be debated in the coming years as the nations of Europe continue to hammer out their United States of Europe, Inc. organizational structure and make the changes needed to harmonize their accounting procedures with those commonly used in the United States. In this regard, identifying mutually acceptable methods of accounting for goodwill appears to represent a good starting point, but much work remains to be done before this level of convergence and harmonization is achieved.
Works Cited
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Financial Accounting Standards Board. “Business Combinations.” Statement of Financial Accounting Standards No. 141. Norwalk, CT: FASB, June 2001.
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Francis, J., Hanna, D.J., and Vincent, L. (1996). “Causes and effects of discretionary asset write- offs.” Journal of Accounting Research, 34 (Supplement): 117-34.
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Henning, S.L., Shaw, W.H., and Stock, T. (2002). “The amount and timing of goodwill write- offs and revaluations: Evidence from U.S. And U.K. firms.” Working paper, Southern Methodist University, July 2002.
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Jennings, R., LeClere, M., and Thompson II, R. (2001). “Goodwill amortization and the usefulness of earnings,” Financial Analysts Journal, September/October: 20-8 in von Colbe at 201.
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Directive 2001/65/EC of the European Parliament and of the Council of September 27, 2001 amending Directives 78/660/EEC, 83/349/EEC, and 86/635/EEC as regards the valuation rules for the annual and consolidated accounts of certain types of companies as well as of banks and other financial institutions, O.J. No. L 283 of October 27, 2001.
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Our essay writers are graduates with bachelor's, masters, Ph.D., and doctorate degrees in various subjects. The minimum requirement to be an essay writer with our essay writing service is to have a college degree. All our academic writers have a minimum of two years of academic writing. We have a stringent recruitment process to ensure that we get only the most competent essay writers in the industry. We also ensure that the writers are handsomely compensated for their value. The majority of our writers are native English speakers. As such, the fluency of language and grammar is impeccable.
What if I don’t like the paper?
There is a very low likelihood that you won’t like the paper.
Reasons being:
- When assigning your order, we match the paper’s discipline with the writer’s field/specialization. Since all our writers are graduates, we match the paper’s subject with the field the writer studied. For instance, if it’s a nursing paper, only a nursing graduate and writer will handle it. Furthermore, all our writers have academic writing experience and top-notch research skills.
- We have a quality assurance that reviews the paper before it gets to you. As such, we ensure that you get a paper that meets the required standard and will most definitely make the grade.
In the event that you don’t like your paper:
- The writer will revise the paper up to your pleasing. You have unlimited revisions. You simply need to highlight what specifically you don’t like about the paper, and the writer will make the amendments. The paper will be revised until you are satisfied. Revisions are free of charge
- We will have a different writer write the paper from scratch.
- Last resort, if the above does not work, we will refund your money.
Will the professor find out I didn’t write the paper myself?
Not at all. All papers are written from scratch. There is no way your tutor or instructor will realize that you did not write the paper yourself. In fact, we recommend using our assignment help services for consistent results.
What if the paper is plagiarized?
We check all papers for plagiarism before we submit them. We use powerful plagiarism checking software such as SafeAssign, LopesWrite, and Turnitin. We also upload the plagiarism report so that you can review it. We understand that plagiarism is academic suicide. We would not take the risk of submitting plagiarized work and jeopardize your academic journey. Furthermore, we do not sell or use prewritten papers, and each paper is written from scratch.
When will I get my paper?
You determine when you get the paper by setting the deadline when placing the order. All papers are delivered within the deadline. We are well aware that we operate in a time-sensitive industry. As such, we have laid out strategies to ensure that the client receives the paper on time and they never miss the deadline. We understand that papers that are submitted late have some points deducted. We do not want you to miss any points due to late submission. We work on beating deadlines by huge margins in order to ensure that you have ample time to review the paper before you submit it.
Will anyone find out that I used your services?
We have a privacy and confidentiality policy that guides our work. We NEVER share any customer information with third parties. Noone will ever know that you used our assignment help services. It’s only between you and us. We are bound by our policies to protect the customer’s identity and information. All your information, such as your names, phone number, email, order information, and so on, are protected. We have robust security systems that ensure that your data is protected. Hacking our systems is close to impossible, and it has never happened.
How our Assignment Help Service Works
1. Place an order
You fill all the paper instructions in the order form. Make sure you include all the helpful materials so that our academic writers can deliver the perfect paper. It will also help to eliminate unnecessary revisions.
2. Pay for the order
Proceed to pay for the paper so that it can be assigned to one of our expert academic writers. The paper subject is matched with the writer’s area of specialization.
3. Track the progress
You communicate with the writer and know about the progress of the paper. The client can ask the writer for drafts of the paper. The client can upload extra material and include additional instructions from the lecturer. Receive a paper.
4. Download the paper
The paper is sent to your email and uploaded to your personal account. You also get a plagiarism report attached to your paper.
PLACE THIS ORDER OR A SIMILAR ORDER WITH US TODAY AND GET A PERFECT SCORE!!!
