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Marco Giuliani is assistant professor in Accounting and Business Administration at the University of the Marche (Italy). His research interests regard financial accounting and measurement and valuation models for intangibles. He teaches financial accounting and business administration. He is a Qualified Chartered Accountant, Registered Auditor and Consultant of the courthouse of Ancona (Italy).
Daniel Brännström is lecturer in accounting at the University of Uppsala (Sweden). His research interests regard financial accounting and measurement and valuation models for intangibles. He teaches financial accounting and corporate valuation.
Goodwill and IFRS3: in search for a ground-based definition
Purpose - This research aims to identify a ground based definition of goodwill related to how companies describe their purchased goodwill. It focuses on whether there is any consistency in how the firms define goodwill in practice in the first year application of IFRS3.
Methodology - The papers builds on a qualitative analysis of how companies describe goodwill in purchase analyses related to company acquisitions. The empirical corpus of this study is represented by the financial statements of Italian and Swedish listed companies.
Findings - The overall finding of this investigation is that, in practice, the concept of goodwill is unclear and therefore there is no reference to one singular definition of goodwill. Moreover, in spite of the idea underlying IFRS3, goodwill still appears to be a black box and therefore and accounting inertia is highlighted.
Research limitations/implications - The main limitation is that only a sample of firms (the listed ones in the SSE and MTA) that apply IFRS3 has been investigated. The main implication of this paper is that it is not possible to identify a unique definition of goodwill but only but some common classes. Therefore some accounting policy suggestions are proposed.
Originality/value - First, most of the study tend to focus on goodwill from a quantitative perspective; in this paper, instead, we focus on its qualitative aspects. Second, in comparison to the previous qualitative studies, this does not have the ambition to supply another theoretical or "in vitro" analysis of goodwill but to observe goodwill "in vivo", i.e. how goodwill is defined in practice in contrast to theoretical definitions.
Keywords - goodwill, IFRS, financial accounting, intangible assets, business combination.
Paper type - Research paper.
Goodwill and IFRS3: in search for a ground-based definition
Accounting for goodwill constitutes ongoing challenges to accounting practitioners (Powell, 2003). During the last century there has been a gradual shift from non recognition of goodwill on the balance sheet towards its inclusion, now even without having to be amortized (Davies and Waddington, 1999). In this setting several attempts have been made to define goodwill. Some authors interpret it as a valuation of favourable attitudes toward the firm, present value of superior earnings, master valuation account (Hendriksen and Van Breda, 1992); other as general label for intangible assets (Lewis and Pendrill, 2000) while other as just the name to give to the difference between the price an acquirer pays for a business and the value of the individual identifiable assets it acquires (Higson, 1998). Albeit it has been discussed for decades (Bloom, 2008; Higson, 1998; Seetharaman, et al., 2004), the concept of goodwill is still vague and consequently some authors consider it as a sort of "black box", expression used, for example, by Power (2001) and by Lev and Zambon (2003).
Goodwill as a "black box" makes it an issue. In fact, the practice of referring to it without a clear definition implies problems because the relation of goodwill to the other items becomes unclear (Gröjer, 2001) and consequently it becomes difficult to understand. The difficulties related to goodwill as an elusive and vaguely defined asset have several effects. In way of example, Revsine et al. (2004`, p. 904) find that acquired goodwill is difficult to interpret, because it is comprised of many different components. It involves premium paid for intangible assets that are not individually identifiable, as well as expected future improvements in performance, such as synergies. It also includes overpayments, i.e., premium paid without any future economic benefit. According to Llwellyn (1994, p. 11-12) "[t]he inclusion/exclusion of intangibles, such as goodwill, involves the management of conceptual and measurement uncertainties" and therefore it can generate managerial and ethical problem. Consequently the nature of goodwill is ambiguous.
To improve goodwill disclosure and moving from the consideration that it tends to represent a large part of the purchase price, as also shown in some recent studies (Bloom, 2009; Brännström, et al., 2009), a new accounting regime has been introduced through International Financial Reporting Standards 3 (IFRS3) on business combinations. This regime has been supported by the introduction of mandatory use of IFRS within the European Union. The IFRS3 evolves the disclosure of goodwill stating that firms have to supply a quantitative and a qualitative description of the factors that enables the goodwill to be recognised. All in all, IFRS3 can be considered as an attempt to open the black box of goodwill (Brännström, et al., 2009).
These considerations open the possibility to contribute to the previous research regarding the definition of goodwill (Bloom, 2009; Colley and Volkan, 1988; Johnson and Petrone, 1998) adopting a bottom-up approach, i.e. adopting an empirical definition of goodwill as practice is asked to give precision to its content. Griffiths (1986) argues that goodwill does not exist default but is what it is described as and by focusing on purchased goodwill it is possible to investigate what companies refer to goodwill in practice. This is opposite from defining goodwill a priori or just from a theoretical point of view. Therefore, the purpose of this paper is to identify a ground-based definition of goodwill related to how companies describe their purchased goodwill. The empirical corpus of this study is represented by the financial statements of Italian and Swedish listed companies.
The structure of the paper is outlined as follows. First a review of the literature related to goodwill and IFRS3 is presented. The subsequent section presents the design of the study followed by a presentation and illustration of the results. The paper ends with a discussion on the results, followed by conclusions and future research opportunities.
2. The "black box" of goodwill: the state of the art.
Literature has been discussing the topic of accounting for intangibles for a long time (Canibano and Garcia Ayuso, 2000). In the case of financial accounting, the focus is not only on intangible assets but also, and may be especially, on goodwill (Colley and Volkan, 1988; Henning, 2000). In an early treaty on the nature and value of goodwill, P.D. Leake (1914) as quoted in (Sterrett, 1915), states that goodwill comprises the value lodged in the "rights to carry on industrial and commercial enterprises, with the benefit of current contracts including leases, and the use of trade-names, and trade-marks; patent rights; copyrights and rights to exercise monopolies".
Yet it still can be problematic as it lacks a proper recognition base (Tollington, 1997).
Studies on goodwill can be divided into two main streams. The first one is mainly focused on the quantitative aspects or effects of accounting for goodwill. In this field studies examine the materiality of goodwill, its valuation, amortisation and impairment and what the effect of accounting for goodwill is and has on the capital market (Beatty and Weber, 2006; Carlyn, et al., 2009; Churyk, 2005; Dahmash, et al., 2009; Dorata, 2009). The second stream, instead, is centred on the qualitative dimension of goodwill, i.e. what it is, in which way it is disclosed and how companies describe and explain it. This stream is dominated by qualitative methodologies such as content analyses (Brännström, et al., 2009; Higson, 1998; Johnson and Petrone, 1998). These two perspectives should be considered as complementary ways to observe a complex object. In the case of goodwill, the first approach can count on several studies while the second one does not appear equally developed, probably due to the lack of data. This paper contributes to the qualitative studies on goodwill.
Deepening the qualitative stream, some authors (Colley and Volkan, 1988; Johnson and Petrone, 1998) identify two main perspectives from which goodwill can be observed: a top-down and a bottom-up perspective. From the first perspective, goodwill is considered as a component of a larger asset or, more precisely, as a leftover of the breaking down process of the larger asset into its identifiable constituents parts. Trace of this approach can be found also in IFRS3 where goodwill is "â€¦the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed measured in accordance with this IFRS" (Â§32b) and therefore it is a mere residuum (Bloom, 2008). As a result, goodwill is a prime example of an issue conceived in a way that in principle is unsolvable (Bloom, 2008) and this implies that it is vague, problematic to understand and with unclear relations with the other accounting items. All in all, goodwill can be considered as a kind of "accounting nonsense" (Gröjer, 2001).
From a bottom-up perspective, instead, goodwill is viewed in terms of its components, i.e. goodwill is the sum of not identifiable intangible assets or a sort of "purchase premium" (Baker, et al., 2002; Hendriksen and Van Breda, 1992; Higson, 1998; Mueller, et al., 1994). From this point of view, as summarized by Johnson and Petrone (1998), goodwill can be the accounting item used to represent the following phenomena:
excess of the fair values over the book values of the acquiree's recognised net assets;
fair values of not identifiable intangible assets;
fair value of the "going concern" element of the acquiree's existing business;
fair value of synergies from combining the acquirer's and acquiree's businesses;
overpayment by the acquirer.
From a conceptual perspective, according to Johnson and Petrone (1998) only phenomena 3 and 4 are part of the "core" goodwill. Those phenomena are used by firms to represent the value of the interaction between goodwill items and/or between the resources of the acquirer and the acquiree (Gupta and Roos, 2001). The phenomena 1 and 2 are asset themselves or part of other assets that accounting rules do not allow to account for specifically; therefore they are the results of the accounting policy defined time by time (Gowthorpe, 2009). Phenomenon 5 is conceptually neither goodwill nor an asset but the result of a measurement error. Concluding, it becomes particularly important to analyse goodwill not from a theoretical point of view, but from the assumption that goodwill is what it is described as in practice (Griffiths, 1986).
Moving from the assumption that more information is preferred to less information, a new accounting regime came into effect in 2005 by the mandatory adoption of IFRS in the EU. These standards represent a standpoint indicating that increased information and fair value treatment will help the capital market to gain insight into what has been acquired. This included the IFRS3, introduced in 2004, an accounting principle dedicated to the regulation of the accounting for business combination. Considering that firms are not allowed to account for their own goodwill but only for the purchased one, i.e. only when they acquire another firm or a branch of another firm, the relevance and the impact on counts of this accounting principle is clear. The accounting innovations introduced by this principle are several. First, it prohibits the pooling of interests which was, according to previous accounting principles, the only alternative method to the purchase method which is now the mandatory procedure. Second, albeit purchase price allocation has not changed radically, the demands of disclosure has become more rigorous. Third, IFRS3 prohibits the amortisation of goodwill and instead requires the goodwill to be tested for impairment annually, or more frequently. Fourth, it states that a company has to supply a qualitative description of the factors that enables the goodwill to be recognised, such as expected synergies from combining operations, intangible assets that do not qualify for separate recognition. This fourth aspect is the one investigated in this paper.
With the introduction of the IFRS3, it appears that the IASB has combined the top-down perspective with the bottom-up one. In fact, from a quantitative perspective, goodwill is still the part of the purchase value that is not possible to allocate to the purchased identifiable assets and consequently it continues to be a residuum. From a qualitative point of view, once the value of goodwill is defined, there is the need to understand and to investigate it and disclose what it is made of. This means that its components, typically hidden, have to become visible as in the bottom-up approach. All in all, IFRS3 can be seen both as a confirmation of the IASB idea that goodwill exists default and as an effort to opening the "black box" of goodwill.
3. DESIGN OF THE STUDY
To achieve the aim of this study we first decided to analyse listed companies. Since their financial statements are freely available and easy to collected and because bigger firms are more likely to disclose more information (Guthrie and Mattews, 1985). Second, to reduce the risk that the results could be country specific and to have a wide sample of firms we decided to analyse two countries: Sweden and Italy. The choice of these two countries was due to the fact they are quite similar in several aspects: they both adopt IFRS and the companies and markets have similar dimensions and characteristics, law systems, firm ownership structures, macro-based accounting system, economies and some other social and political aspects. All these elements allow to aggregate the data and to develop robust analyses based on a meaningful sample. Table 1 gives support to the similarities in concern of listed firms.
The documents investigated were the annual reports (Guthrie, et al., 2004). In particular, the annual reports used to extract the data are referred to the firms listed on June 19th, 2007 on the Stockholm (SSE) and the Milano Stock Exchanges (MTA/MTAX) with fiscal year ending before December 31st, 2006. The considered annual reports have been the ones referring to fiscal year 2006 or 2005/2006 and the reason for a closing-date approach is due to the availability of data. With this choice, the first mandatory year of IFRS3 is investigated and by focusing on one year enabled us to collect more detailed data. We do not though attempt to make a general investigation or evaluation of IFRS3 or analyse trends over time.
Table 1 - Sample statistics
Number of listed companies
Number of listed companies with business combinations
Number purchase operations declared
Number purchase analysis disclosed
A sample size between 200 and 300 listed firms can according to Schipper (2005) be considered sufficient and as seen in Table 1 the sample sizes in both countries follows this. In the table the number of listed companies that have done at least one acquisition is also found. The unit investigated is the purchase analysis and for Sweden this is 170 observations and for Italy 138. From the table it is an average of two purchase analyses for each company but there are some extreme situations. In Sweden eight purchase analyses were made by one firm and in Italy 38 acquisitions were presented in one purchase analysis. Considering that not all the information needed did exist in databases, we collected them manually using the English edition of the financial statements. If no English version was available, the Italian or Swedish ones were used and translated where needed.
Content analysis and disclosure index are the methodology used. Content analysis is oriented towards of empirical material (Krippendorff, 1980), enabling a classification of the material and measurement of disclosure. Classification is made from some kind of predetermined scheme, which in this research is derived from the empirics. Disclosure index is then used as an extension of content analysis (Beattie, et al., 2004) through the registering of occurrences. Combining content analysis and disclosure indexes should allow achieving the purpose of this paper.
The analysis of the content of goodwill has been done first by performing a quantitative analysis, to understand the relevance of the phenomenon, and second, by reading the explanations. When estimating the relative size of goodwill in relation to intangibles overall for the quantitative analysis, the part recorded for the analysis is represented by the adjustments of intangible assets. We excluded from the analysis the few cases in which the value of goodwill or purchase price were equal to zero. This was done in order to guarantee the usefulness of ratios used when the results are presented and analysed in quantitative form. The later perspective of reading the explanations represents the core of the investigation because it allows opening the "black box" of goodwill.
Having to investigate goodwill from a qualitative perspective, in a first step we identified some reoccurring themes in order to define a classification scheme from a ground based definition. The identification of the themes has been done observing a sample of the reports examined and then testing it with some other reports. In case the an evidence did not fit in the model developed initially we added to it a new class. In developing the classification model, we tried to build a "good classification model", i.e. without any residual class or overlap between classes and able to describe the universe (Gröjer, 2001). This classification scheme has then used in a second step for classifying and indexing the empirics.
Moving from the designed classification model, we have organised the data collected as follows The first analysis is based on macro-classes named: "identified goodwill", "not specified", "residuum" and "overpayment". The underlying idea of this classification is to distinguish the cases in which goodwill is defined and described from the cases in which it is kept as a "black box", as an unclear object. The first class includes all the cases in which companies supply a clear description of goodwill in terms of intangibles and/or synergies. The second class "not specified" includes all the "not explanations" of goodwill, i.e. all the cases in which companies disclose that "it is not possible to specify goodwill according to IFRS3" or similar expressions. The third category represents the cases in which there is an absence of explanation in which goodwill is just defined as "the difference between the purchase price paid and the net asset acquired". The last category includes all the cases in which goodwill is due to overpayment and should consequently immediately be written off, according to the accounting principles.
The second level of analysis focuses on the class "identified goodwill" in order to understand how it is described and consequently how it can be defined. In this phase, we adopt the following macro-classes named: "core goodwill", "intangibles", "core goodwill and intangibles" and "overpayment". This categorisation is designed that a definition can be recorded in one category only. The first class includes all the explanations related to the interpretation of goodwill as the accounting label for synergies and benefits (e.g. "extra sales", "economy of scale", "profitability", etc.). The class "unidentified intangibles" includes all the intangibles a company cannot account for in its financial statement according to IFRS3 such as personnel, knowledge, market position, marketing organisation, etc. The third class includes the widest definitions of goodwill, i.e. when it is referred both to core goodwill and to synergies. In spite of our attempt this becomes similar to a residual class. The forth class represents all the cases in which goodwill is generated by overpayment of net assets and, consequently, by measurement mistakes
Following the definition of classes, their frequencies were counted. In this counting, only one count was done for each class even if several items belonging to the same class are mentioned in the same explanation. An example of this is that "personnel skills" and "personnel competences" in the same explanation would be counted only once. The coding and counting were done independently by the authors with a similar result. In each of the two analyses, we have also extracted some full sentences used by companies to describe their goodwill as examples.
The limitations of this work are the following. The first is that we could investigate only a sample of firms that apply IFRS3 from two countries and not all the companies that apply IAS/IFRS. Albeit the "country effect" can have some impact on the analysis, we suppose that it is not so relevant in this study considering the purpose of this research which is to analyse goodwill in practice and not to develop an inter-country comparison. Moreover, the choice of Italy and Sweden allowed us to examine the reports of all the listed companies, both of the companies which supply their financial reports in English and of the ones which write their report just in Swedish or in Italian. In addition, the fact that the authors are native-speakers reduced the risk of mistranslation of the non-English reports. Other general limitations are related to the methodology applied. In fact, as highlighted by some authors (Guthrie, et al., 2004), content analysis has its main limitation in the subjectivity involved in coding and in the unduly emphasis on quantity over quality of disclosure. To mitigate this aspect, we have not only counted but also analysed and reported full paragraphs in order to deepen also the qualitative apsects.
4. GOODWILL "IN VIVO"
For understanding the impact of goodwill in acquisitions on a more general level, the amount of goodwill in relation to purchase price and the amount of identified intangible assets in goodwill is presented. From that ratio goodwill/purchase price emerges that a major part of the purchase price is made up of goodwill and reflects the relevance of the phenomenon investigated. The median is 76.03% in Italy and 77.65% in Sweden. These figures highlights that acquisitions in Italy have almost the same goodwill intensity as in Sweden and thus the related information are comparable. Moving to the core of this work, Table 2 shows the first phase of the qualitative analysis carried out. Because the category "Overpayment" has no occurrences, we have excluded it from the table.
Table 2 - Intangible assets in purchase analyses
Not possible to specify
No. of purchase analyses in which goodwill is presented
The data shows that the majority of companies refer to goodwill as a residuum. This means that goodwill is not explained or it is explained as a mere difference. In way of examples, we can quote two descriptions of this type of goodwill which are representative also of other companies:
"Goodwill recognised as an intangible asset is associated with business combinations and represents the difference between the cost incurred to acquire a company or division and the sum of the values assigned, based on current values at the time of the acquisition, to the individual assets and liabilities of the given company or division" (Finmeccanica SpA - Italy)
"An intangible asset may be recognised as goodwill when the positive difference between fair value of shareholders' equity acquired and the purchase cost of the equity investment (inclusive of accessory costs) is representative of the future income-generation potential of the equity investment" (Banca Intesa - Italy)
Goodwill becomes a left over as it is typical in the top-down perspective. No qualitative analysis is developed and therefore it is still difficult to understand it despite the boost of IFRS3 to disclose more information. From this point of view it appears that the idea of the IFRS3 to make goodwill clear has not yet penetrated the day-by-day accounting practice. Adopting a more theoretical perspective, the approach used, i.e. goodwill as a difference, is in contrast with the fact that some of these companies recognize goodwill as an asset. In way of example, we have extracted two similar definitions supplied by Italian companies:
"Goodwill arising out of the acquisition is recognized as an asset" (Autogrill - Italy)
"Goodwill is recognized as an asset and reviewed annually in order to determine any impairment loss" (Recordati - Italy)
According to Bloom (2009), this definition underlies the concept of goodwill as a bundle of not identifiable intangible assets according to the accounting principles but that should be possible to describe. In other case, goodwill is neither described nor defined but just valued:
"Goodwill is distributed among cash-generating units and tested annually for impairment" (Saab Group - Sweden)
"Any excess of the cost of the acquisition over the company's interest in the fair value of the investee company's shareholders' equity at the date of the acquisition is recognised as goodwill" (Acea SpA - Italy)
While the concept of goodwill as undefined accounting item can be considered consistent with the top-down approach, the cases in which goodwill is defined as an asset appear to be problematic from a theoretical perspective. More in depth it seems that, in practice, goodwill is considered to be an asset as well as any other intangibles. Therefore the taxonomy proposed by Johnson and Petrone (1998) is not fully recognised empirically.
It is also interesting to highlight that the case of overpayment is absent albeit companies tend to recognise it some years later and consequently do write-offs (Churyk, 2005). This phenomenon appears to be "physiologic", i.e. related to the acquisition of new information, or "pathologic". For example, Gu and Lev highlight that "Share overpricing provides managers with strong but distorted incentives to acquire companies - sometimes strategically misfit and overpaid for businesses - in order to obscure the overpricing from investors and postpone, perhaps even prevent, the day of reckoning (the overpricing reversal)" (Gu and Lev, 2008).
Moving now to a more detailed investigation of the cases in which goodwill is identified, we can distinguish three classes of goodwill in Table 3.
Table 3 - Classes distinguished in goodwill
Core goodwill and intangibles
The explanations which relate to the concept of "core goodwill" are synergies and benefits.
"The goodwill is attributable to the high profitability in the acquired company as well as synergies which are expected to arise due to the acquisition. A review of intangible assets has been conducted but no assets that can be capitalised have been identified." (Gunnebo - Sweden)
"Goodwill is due to future internal synergies obtainable from the joint management of the advertising revenues and to the acquisition of a strategic position in the north east of Italy" (Caltagirone - Italy)
"The value of goodwill originally recognized relates to expected synergies and other benefits stemming from the integration of the new subsidiaries' assets and activities with those of the Group" (Eurotech - Italy)
In these cases the idea of goodwill is bundled with the ones of synergies and profitability (extra-profits, economy of scale or extra-sales). The fact that this category represents the most relevant component of goodwill fits well with theory: achieving synergy is, in general, one of the most important theoretical arguments behind integration and, in particular, in developing business combinations (Ansoff, 1984; Porter, 1998; Tuch and O'Sullivan, 2007; Walter and Barney, 1990). Still, maybe the concept of synergy is a "carte blanche" that gives the firm free hands to explain why they bought a firm (to expensive). Albeit that economists argue that synergies mostly come from lowering costs (see e.g. Gaughan, 2002), strategists argue that the combination of two firms' unique and valuable resources can help to create synergies that either company would not possess on their own (Barney, 1991). Whilst the success of growing and getting synergies through M&A may be debated (King, et al., 2004), synergies are a common argument in the business discourse. Independently from these different approaches, goodwill appears to be an accounting item useful to represent a company's perspectives - i.e. expected future profitability. As it thus keeps some of the situation specific aspects, it can become difficult to understand.
Beside this idea, a minority of the company consider goodwill an accounting item useful to account for specific intangibles which do not match the IAS/IFRS criteria to be considered as assets. In this category we can find, in way of examples, the following definitions:
"Goodwill arose at the acquisition of NOTE Oslo AS because acquired intangible values did not satisfy the criteria for accounting as other intangible assets at the time of acquisitions" (Note - Sweden).
"The reported value of goodwill includes the value of the technical knowledge and expertise of the employees in the acquired operations" (Sweco - Sweden)
"The goodwill arising on the acquisition results from assets which cannot be recognised separately and measured reliably including early stage pipeline products and a highly skilled workforce" (Astra Zeneca - Sweden)
"â‚¬ 20.4 million, which can be traced back to intangible fixed assets with an indefinite life, (goodwill), relating to airline catering, terminal catering, and business catering, and was therefore not amortized and is subject to periodic impairment testing" (Save - Italy)
"The goodwill recognised for Anticimex represents a well functioning organisation with the ability to broaden the product offering and the ability to conclude agreements with partners, a business model that provides strong cash flows, a market leading position as well as intangible assets that cannot be identified and measured separately from goodwill" (Ratos - Sweden)
All these cases appear to be an attempt to open the "black box" of goodwill. The intangibles that constitute goodwill are identified but not individually valued or reported analytically. In this case the existence of goodwill can be due to the actual accounting regulation, i.e. the definition of "asset" stated by the accounting principles. In way of examples, Eckstein (Eckstein, 2004) evidences that a workforce does not meet the definition of an asset due to the lack of control over the expected future economic benefits from a skilled workforce. All in all, according to Bloom (Bloom, 2008), in these cases goodwill can be properly considered as an asset. From a temporal perspective, while in the previous evidence goodwill was an accounting item used to report future perspective, here it appears to be a synthesis of the historical costs related to specific resources or activities developed by the company (e.g. skilled workforce, airline catering, etc.) and of the future benefits generated by these items. Therefore the level of uncertainty related to this kind of goodwill appears to be lower than the one of the core goodwill and therefore, from an investor perspective, should be approached in a different way.
In the last group, which is the most populated, companies stretch the concept of goodwill to include in it both the idea of core goodwill and the one of not identifiable intangibles.
"The goodwill reported for Jøtul represents a strong market position, a distribution organisation with good relationships with retailers, the strong management with a detailed acquisition strategy and a business plan based on a growth programme. GoodÂwill also represents synergy effects between Jøtul and Krog Iversen as well as intangible assets that cannot be identified and measured separately from goodwill" (Ratos - Sweden)
"Goodwill is attributable to the company's future ability to generate profits and cash flows. This is a combined effect of many individual factors, including competent and dedicated employees, strong enrolment of pupils and a good reputation in the market" (Bure Equity - Sweden)
In these cases goodwill becomes partly clear but still not understandable in dependence of the fact that it is not possible to visualise which size of it belongs to synergies and which to intangible assets. The boundaries of goodwill are stretched and therefore the concept of goodwill becomes wider and "hybrid" because it includes assets and non assets, items with different level of uncertainty, past and future perspectives. All in all, albeit the boundaries of goodwill are the widest, from a conceptual perspective this class can be considered in an intermediate position between the first two. This still makes it problematic and difficult to understand as none of the companies distinguish the value attributable to core goodwill from the ones related to intangible assets.
5. REFLECTIONS AND CONCLUSIONS
The purpose of this paper was to focus on the definition of goodwill based on how companies describe their purchased goodwill. In other words our aim was to investigate how the concept of goodwill is interpreted by companies in order to develop a ground-based definition. The empirical corpus of this study is represented by the financial statements of Italian and Swedish listed companies.
The first result that emerges from the study is that, in spite of the stimulation coming from the IFRS3, it appears that the top-down approach is still predominant, i.e. goodwill is still seen as a residuum and consequently it persist to be a "black box". From this point of view, it is possible to notice an accounting inertia (Oldroyd, 1999) which arises because of the reluctance of accountants to adopt the new practices (IFRS3) and ideas allied to their hesitancy in discarding old ones, i.e. considering goodwill as a mere difference. This phenomenon seems to be not rare and has been study also in other researches (see, for e.g. Carlyn, et al., 2009). The second result is that, in the cases where the composition of goodwill is disclosed, three different interpretations have been found. The first one is when goodwill is considered as an accounting item useful to represent synergies; the second one is when goodwill is used to represent a bundle of intangibles which do not match the IAS/IFRS criteria to be considered as assets; the third is an intermediate position in which goodwill includes both synergies and intangibles. All in all, adopting a ground-based perspective, goodwill appears to be with unclear boundaries, more or less wide, and still difficult to understand. In addition, we did not find any predominant behavior useful to construct a definition. The absence of a general definition leads to some considerations.
From a policy perspective, the study leads to the idea that to improve comparability a more enhanced definition of goodwill and a better stimulation of the companies in making goodwill clearer in their accounts appear to be desirable. This approach can be partly found in the arguments proposed by some authors regarding accounting harmonisation in general and of intangibles in particular (Brännström and Giuliani, 2009; Stolowy and Jeny-Cazavan, 2001; Vergauwen and van Alem, 2005). Assuming that goodwill exists default, a proposal can be to limit the content of goodwill to the core goodwill and to oblige firms to identify all the intangibles. In this way, goodwill will be matched with different kind of synergies and all the other elements will be identified. A step toward this solution is made by the new release of IFRS3 which allows to account for intangible assets even if not reliably measured. The problem that will remain is still the restricted definition of "asset" supplied by IFRS which does not make possible to specifically account for intangibles which can have a relevant value such as human capital.
Beside the accounting harmonisation problem, the limited understandability of goodwill also causes potential valuation problems. The general idea of accounting valuation resides on the need of identifying the object of valuation at first (Penman, 2007). Moreover, according to Lonergan (Lonergan, 2009), accounting measurement practices relates more to individual identifiable intangible asset rather than to the total intangible value and total goodwill value. Therefore, the uncertainty of the content and of the boundaries of goodwill implies that also its valuation and impairment will risk to be difficult to audit and consequently easy to manipulate (Gwilliam and Jackson, 2008). The practice solution proposed by Bloom (2009) and Lonegran (2009) is to value goodwill with a market top-down approach which, as shown, risks to lead companies also to consider goodwill, not only from a quantitative but also from a qualitative perspective, as a residuum creating, therefore, a kind of contrast between the two perspectives.
From a critical accounting perspective, it can be also argued that the results illustrated are just the evidence of the fact that companies probably are reluctant to disclose intangibles (intangible assets and goodwill) (Brennan, 2001; Gröjer and Johanson, 1999) and consequently considering goodwill as a residuum is an easy way to avoid the problem. From this point, the underlying assumption of IFRS that more information is better than less spurs a conflict. The needs of the capital markets have to be balanced with the risk of losing a competitive edge by disclosing strategic information to the market and, consequently to the competitors. In addition, intangibles (assets and goodwill) are firm specific and consequently accounting labels, such as customer capital, technology, etc. are not able to adequately represent their essence. The idea can therefore at the same time be brought forward if this qualitative information needs to be complemented in order to give an exhaustive description of these assets and be useful. Using an additional report, e.g. Intellectual Capital report, can thus be fruitful (Petty and Guthrie, 2000; Van der Meer-Kooistra and Zijlstra, 2001). All in all, this investigation re-proposes the idea that despite the effort of the IASB to make the boundaries of the financial statement wider, it has not yet been able to adequately represent intangibles.
Future research opportunity are represented by a diachronic analysis focused on a comparison between the data here presented and the ones related to the IFRS3 revised to understand if the distance between the world described by the accounting principles (de-jure) and the real world (de-facto) is reduced or enlarged and consequently to decide if this way of ruling for goodwill is useful for achieving the desired goal.