Results for initial and subsequent impairment of recorded goodwill


Descriptive statistics for all models are presented in Table 1. Average yields, minimum and maximum for acquirer and target of synergy, agency conflict, and / or arrogance are presented in millions of Panel THE. Statistics non-dichotomous variables for model initial and subsequent deterioration displayed in panels B and C in Table 1, respectively. Average values, minimum and maximum initial deterioration model in panel B refers to year of purchase. Number of observations varies from 153 to 162. Values reported for model of resulting alteration in Group C are from first year after acquisition and second year after acquisition and are measured in millions. Number of observations varies from 109 to 135. Additional tests included t tests comparing sample to population of firms reporting goodwill over years 1996-1998. Amount of goodwill is considered goodwill, not total value added by the specific purchase, as in Table 1. T test results show that sample and population are not statistically different from total debt (p = 0.32) and slightly different for total assets (p = 0.07). Sample population is larger than book value of assets, goodwill and market value of equity.

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Multicollinearity diagnostic, and Pearson correlations and Spearman are carried out, although not presented to independent variables included in equations. Figures. (6) and (7). Because some correlations are high, variation factors of inflation (VIFs) are examined. THE VIF in excess of 10 indicates multicollinearity and can influence least squares estimates (Neter et al., 1996). VIFs range from 1.05 to 1.36 for all models, indicating that results are not unduly influenced by multicollinearity.

Regression results

Synergy, agency conflict, and/or hubris

Table 2 presents results of regressing target gain on total gain (Panel THE) and target gain on acquirer gain (Panel B) for entire sample as well as for positive and negative gain subsamples. Examination for heteroskedasticity reveals that only one regression in Panel B (positive total gain sample) is not heteroskedastic with the White's (Neter et al., 1996) statistic of 7.86. All other regressions are heteroskedastic (White's statistics ranging from 38.12 to 123.8) and require use of White's heteroskedasticity consistent estimators for these regression.

Table shows coefficient estimates with t-statistics in parentheses. OLS estimation is used for positive gain subsample in Panels B and C. Estimations are based on White's (1980) consistent covariance estimators for all others.

All regression equations are conducted with dollars in millions and include dichotomous variables for multiple acquirer purchases and for purchase year.

TARG=gain to target firm i (cumulative abnormal return multiplied by market capitalization), AG=gain to acquirer firm j (cumulative abnormal return multiplied by market capitalization), TOTG=total gain (target gain, firm i, plus acquirer gain, firm j).

Target gain is measured over the period beginning 5 days before announcement of first bid and ending 5 days after successful bid. Acquirer gain is measured over the period beginning 5 days before their first announcement of the bid and ending 5 days after announcement of success. One hundred and twenty-two of 124 acquirer firms have CAR return periods of 11 days. Two acquirer firms have an average CAR return period of 95.0 days due to acquirer submitting multiple bids. One hundred and eleven target firms have CAR return periods of 11 days. remaining 13 target firms have an averaged CAR return period of 68.54 days due to multiple bidders.

Cut-off values for one tailed t-tests are as follows: t.10=1.29 (α=0.10)the; t.05=1.66 (α=0.05)b; t.025=1.98 (α=0.025)c; t.01=2.37 (α=0.01)d; t.005=2.63 (α=0.005)e

Panel THE of Table 2 indicates that, for entire sample, correlation between target and total gains is positive and significant with the coefficient estimate of 0.51 and the significance level (α) of 0.025. This is consistent with synergy. Furthermore, synergy, if it exists, is more likely to be present in positive total gain subsample. Correlation between target gains and total gains in positive subsample and negative subsample are significant with coefficients of 0.32 (α=0.05) and 1.33 (α=0.05), respectively. This implies that synergy appears to be dominant motive for sample acquisitions.

Panel B indicates that, for entire sample and positive gains sample, correlations between target and acquirer gains are not statistically different from zero with coefficient estimates of −0.30 (α=0.25) and 0.11 (α=0.10), respectively. This implies that hubris or agency conflict may be negating effect of synergy. Negative subsample has the coefficient estimate of −1.32 (α=0.05). This implies that agency conflict, in addition to synergy, is present in sample.

Because previous analysis indicates that agency conflict and possibly hubris exist in negative subsample, Panel C of Table 2 reports effect they may have on goodwill through the regression of goodwill on acquirer cumulative abnormal returns. This analysis indicates that, on average, purchased goodwill is not initially overstated due to agency conflict/hubris with coefficients on total, positive, and negative samples of 2.77 (α=0.05), 0.85 (α=0.10), and 6.78 (α=0.10), respectively.

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Initial impairment of previous termgoodwillnext term using the levels model

Table 3 presents estimation results of model in Eq. (6) and includes regressions for each impairment condition with interactions and the single regression with all impairment conditions. Breusch-Pagan values range from 64.16 to 85.55, indicating that White's (1980) correction for heteroskedasticity is necessary. Estimated coefficients on book value of equity less goodwill (γ1) and goodwill (γ2) are significantly positively related to market values as predicted. THE means test between coefficient on goodwill and book value of equity less purchased goodwill indicates that difference between goodwill and other assets is not significant in year of purchase (p=0.18). Thus, market does not value goodwill differently than other assets. An additional regression, including both recently purchased goodwill and all other goodwill, is included. THE means test between two goodwill measures indicates that difference between new goodwill and other goodwill is not significant in year of purchase (p=0.14).

BVLGW represents book value less most recently purchased goodwill except for final model. In final model, BVLGW is measured as book value less all goodwill (GDWL=goodwill from purchase plus OGW=goodwill other than recent purchase).

Table shows OLS coefficient estimates and t-statistics based on White's consistent covariance estimator in parentheses.

Levels variable are reported in millions of dollars. Weight function (1/book value of equity squared) is used to control for firm size and dichotomous variables for multiple acquirer purchases and purchase year are included as control variables.

MVE=market value of equity, acquiring firm j; BVLGW=book value of equity less goodwill resulting from acquisition of firm i, by acquiring firm j; GDWL=goodwill resulting from firm j acquiring firm i; PREM=purchase price paid by acquirer (firm j) less target market value 90 days before target acquisition discussions divided by target (firm i) market value 90 days before acquisition discussions; MB=1 if acquisition was result of the bidding or auction process and 0 otherwise; GWSIG=previous termgoodwillnext term resulting from firm j acquiring firm i, divided by total purchase price; and PS=dollar value of acquirer (firm j) shares used in purchase, divided by total purchase price.

Cut-off values for one tailed t-tests are as follows: t-tests: t.10=1.29 (α=0.10)the; t.05=1.66 (α=0.05)b; t.025=1.98 (α=0.025)c; t.01=2.37 (α=0.01)d; t.005=2.63 (α=0.005)e.

Estimated coefficients on impairment conditions are not different from zero. interaction between GWSIG (goodwill is the significant portion of purchase price) and previous termgoodwillnext term is significantly negative (γˆ8=−0.67, α=0.05) in regression containing only that impairment condition but is not statistically significant in the regression including all impairment conditions. Interaction between variable representing consideration in shares, PS, and previous termgoodwillnext term is significantly negative with coefficients of −0.99 (α=0.10) and −0.90 (α=0.10) for regression containing only that impairment event and regression containing all impairment events, respectively. In summary, results provide weak support for only one of impairment conditions described in ED implying that goodwill is not, on average, initially overvalued.

Subsequent impairment of goodwill

Table 4 presents results for Eq. (7). Regressions that include each individual subsequent impairment condition and the single regression with all subsequent impairment events are presented. Results for first year subsequent to acquisition appear in Panel THE and results for second year subsequent to acquisition appear in Panel B. Breusch-Pagan test statistics range from 93.45 to 93.52 for Panel THE and 53.45 to 57.83 for Panel B, respectively, indicating that White's (1980) correction for heteroskedasticity is necessary.

Table 4: Regression results for subsequent impairment of goodwill Table shows OLS coefficient estimates and t-statistics based on White's consistent covariance estimator in parentheses.

Weight function (1/book value of equity squared) is used to control for firm size and dichotomous variables for multiple acquirer purchases and purchase year are included as control variables.

MVE=market value of equity, acquiring firm j; BVLGW=book value of equity less goodwill resulting from acquisition of firm i, by acquiring firm j; GDWL=goodwill resulting from firm j acquiring firm i, purchased goodwill; CVGM=1 if carrying value of net assets of acquirer is greater than market value, 0 otherwise; and SPD=1 if there is the significant decrease (top quartile) in acquirer stock price since acquisition, 0 otherwise.

Cut-off values for one tailed t-tests are as follows: t.10=1.29 (α=0.10)the; t.05=1.66 (α=0.05)b; t.025=1.98 (α=0.025)c; t.01=2.37 (α=0.01)d; t.005=2.63 (α=0.005)e.

If purchased goodwill is subsequently impaired because carrying value of net assets is greater than market capitalization at balance sheet date, then interaction between purchased goodwill less amortization and impairment condition will be inversely related to market values. In first and second years subsequent to acquisition, estimated coefficients on interaction (θ4) are −2.02 (α=0.005) and −4.54 (α=0.005), respectively, indicating that for firms with book values greater than market values, goodwill is impaired.

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If purchased goodwill is subsequently impaired due to the significant decrease in purchasing firm's stock price since date of acquisition, then interaction between purchased goodwill less amortization and impairment condition will be inversely related to market values. Estimated coefficient on this interaction (θ6) is not significantly different from zero in first year after acquisition, but is significantly negative in second year after acquisition with the coefficient of −3.49 (α=0.01). This result implies that goodwill is impaired in second year subsequent to acquisition when acquirer firm's stock price has declined significantly.

Present trend

Accounting for goodwill

In 1990's, another approach to define good will was produced, which was called residual approach. Residual approach, goodwill is defined as difference between purchase price and fair market value of assets of acquired business. Goodwill is left on amount that can not be identified after the thorough investigation, like any other tangible or intangible (Johnson, 1993).

According Grinyer et al (1990):

... THE root cause of apparent confusion on treatment of goodwill, as in many other accounting matters, arises from failure to identify what accounts are trying to measure and purpose they serve.

His argument is based on two different conceptual models (matching and valuation approach), which are essentially mutually exclusive within the single profit and loss account, however, in practice many theorists do not differentiate between two models, and as the result it is believed that model should be superior to others.

Concept of valuation in accounts can be defined as difference of values in two different dates. Hendriksen (1977) valuation in accounts defined as the process of allocation of significant amounts of quantitative monetary assets. Concepts of appropriate assessment should be based on values of exchange or conversion. There are two types of exchange values. First, output values representing amounts expected to be received by company in future, especially based on exchange price for products of company or outlet. Second, input values, which reflect the certain degree of care in obtaining assets used by company in its operation (Hendriksen, 1977).

Game concept has been defined by American Accounting Association (AAA) committee in 1964 as process of reporting expenses based on the cause and effect relationship with reported income. Committee argued that costs (defined as product and factor services delivered) must be related to income earned in the given period on basis of some significant positive correlation of costs of this type of revenue recognized (Hendriksen, 1977).

Issues relating to treatment of goodwill from perspective of different countries

Debate over how to account for goodwill and intangible assets has lasted more than the decade. Goodwill appeared to be the global concept that encompasses many characteristics of activities of the company that could lead to higher purchasing power, such as excellent management, outstanding workforce, effective advertising and market penetration. In development of accounting treatment of goodwill in SSAP 22 of International Accounting Standards Committee has three options to choose from:

1. Retention costs as the required depreciation on assets with limited life estimate or for an arbitrary period with the specified maximum or minimum;

2. Retention costs as an asset indefinitely unless the reduction in value is evident or

3. Deduct cost of capital to shareholders on date of acquisition.

arguments used against depreciation is net income should not be reduced by depreciation and expenses for maintaining value of goodwill, any amortization period is essentially arbitrary, as life of goodwill is indefinite and that selection of an arbitrary deadline for repayment can lead to an understatement of net income during period and later exaggerated.

Argument in favor of keeping active is made as to its book value should not be reduced as long as asset value seems unlikely to fall below that cost. This method is criticized as goodwill acquired is considered time to be replaced by self-generated goodwill.

Finally, argument to propose that cost of goodwill is deducted from equity is that, as nature of goodwill differs from that of other asset, should not be shown as an asset and therefore requires an accounting treatment special. In particular, it is argued that as goodwill relates to business as the whole, their value can fluctuate according to stock market conditions. Because of its uncertain value and indefinite useful lives, amortization of goodwill would be too unreliable to be used for determination of annual income. Criticisms directed against this option are that it confuses non-accounting and may lead to misinterpretation of the company's financial position.

International Accounting Standards Board has been using SSAP 22 for elimination of goodwill. It allows two different elimination of goodwill, either to retire from reserves or to use goodwill and amortized over their useful lives. However, first option is preferred and used by most of industry in UK. This method ensures that there will be no charge to profit and loss account unless there is the subsequent disposal or closure of business in question. Problem of cancellation of goodwill against reserves is that balance of the purchasing group can be completed quickly and gives impression that equity group has very low or even negative.

In 1990, Accounting Standards Committee came up with the proposal that goodwill and amortized over its useful economic life, with restriction that his life is over 20 years and could never exceed 40 years. proposal was strongly opposed. About 93 percent of business respondents to ED 47, Accounting for Goodwill that they were opposed to mandatory amortization of goodwill. Later, Accountancy Board (ASB, 1993) re-examine issue and came up with the proposal in the working paper, goodwill and intangible assets issued in December 1993. In proposal, noted that ASB allows good will not be charged to profit and loss account through annual depreciation, but the reduction would be necessary only when customer had been impaired in value. Impairment review is the formal test to perform at specified points in time or after events have occurred in particular, to ensure asset value has fallen below its recoverable amount.

On other hand, there has been any question about negative goodwill. According to one article published in Journal of Institute of Chartered Accountants of India, December 1990, negative goodwill in general, arises because of the "trading buy" (for example, if the seller wants sell quickly, or in adverse weather and purchase is willing to buy quickly) or "disadvantages" of fact not included in calculating fair value of net assets acquired. Correct accounting treatment of negative goodwill is taken into account their nature, and which arises due to negotiation of purchase, credit for bookings and to feed profit and loss account, assets are sold or depreciated. If you experience because of disadvantages that should be considered as the provision against which it can be inconvenient to carry when it arises. So, just to give you credit for bookings and stays there, as suggested by SSAP 22 is clearly not correct.

In December 1993 Accounting Standards Board (ASB, 1993b) published FRED 7 Fair Values in Acquisition Accounting. In this discussion paper, Council discussed possible ways to account for goodwill and intangible assets. Six different approaches are discussed, an indication of trouble to reach the solution to problem of accounting for goodwill. In general, there are two approach that has most support were first, the combination of methods of capitalization so amortization over the maximum period of 20 years would be necessary in most cases, but in cases where believes that good will to get lives of more than 20 years, the ceiling test performed. Ceiling test is used to determine life of goodwill.

Under ASB goodwill (1996) proposals would be brought to account as an asset and amortized if:

• Their life expectancy is under 20 years

• Value of goodwill is not significant, or

• Your life is more than 20 years, but finite.

If any of these circumstances applied, and no impairment, this may well be done without depreciation, provided that their book is checked every year across the "review impairment."

IAS 10, goodwill and intangible assets, has been published and is effective for fiscal years ending on or after December 23, 1998. Goodwill is being treated as equals in SSAP 22, either through redemption through profit and loss account over expected useful life, or writes to go directly to reserves. IAS 10 will require most companies to change its accounting policy of willingness to adopt the method of capitalization and amortization. Its main requirement is that goodwill must be capitalized and classified as an asset in balance. However, negative goodwill purchased must be recognized and disclosed separately in balance sheet as deferred credit account, immediately below goodwill of game. Internally generated goodwill should not be recognized at all.

Useful life of goodwill should not exceed 20 years. Book value is amortized in profit and loss account on the systematic basis over estimated useful life. However, if economic life is believed to be over 20 years, and value of goodwill is expected to be significant and continuous measurement in future, there are two ways to treat it. When life can be estimated, carrying amount is amortized in profit and loss account over economic useful life. If economic life is indefinite, goodwill not be amortized. Impairment is required for both roads for treatment of goodwill.

IAS 10 is generally an acceptable and must end debate of goodwill in UK. proposed accounting treatment of goodwill is to be internationally accepted and practiced.

It is not an issue raised in accounts of internally generated goodwill. It is argued that there is no fundamental difference in nature between internally generated goodwill, in fact buy good will could be defined as internally generated goodwill transaction objectively valued at the specific point in time. Therefore, argument was that two types of goodwill could be included in balance of company to ensure comparable financial statements between companies and firms prefer buying organic growth, with assumption that purchased goodwill is not are discharged from reserves immediately. On opposite side, it is argued that although there is no difference between two types of goodwill, goodwill can only be recognized in context of historical cost accounting because it is result of the market transaction crystallizing its value at one point in time, and because historical balance sheet of costs not intended to represent total value of the company as the whole. Besides that, it can also be argued that reader of financial statements can always make adjustments before comparing results of groups that had grown organically with those of groups that had grown by acquisition. Accounting profession has been supporting latter argument.

Australia. Goodwill is defined in IAS 1013 as future benefits of identifiable assets. Examples of identifiable assets include market penetration, effective advertising, and good relations. Most recent IAS accounting of goodwill requires that goodwill be written off "in the linear fashion, from date of acquisition until end of time period during which benefits are expected to arise. " term should not exceed 20 years.

Before this, in Australia, practice of goodwill amortization using method known as "sum invested digit years" (ISOYD). This method allowed the willingness small gate in first years after acquisition to offset higher provisions in recent years. This practice has been criticized as unlikely to meet requirements of IAS 1013.

Definition of goodwill is provided in AAS 18 is same as definition of IAS 1013. This definition applies to both internally generated goodwill and goodwill. Just buy goodwill recorded in account due to problems associated with obtaining reliable and objective measurement of internally generated goodwill. Purchased goodwill is an asset and should be taken into account as the payment for future benefits. Amount recorded is excess of purchase consideration over fair value of identifiable net assets acquired. Once registered, goodwill must be amortized over their useful lives, subject to period of 20 years. This registration method is similar to those applied by Canada and U.S. and is consistent with International Accounting Standards (IAS 22). However, no argument concerns method of accounting treatment of goodwill.

AAS 18 requires goodwill to be amortized. Justification for amortization of goodwill is that it has the limited life and is constantly assumed by internally generated goodwill. However, as internally generated goodwill is not recognized, goodwill must be amortized over its useful life same way as depreciable assets are depreciated over their useful lives. Should be discharged with the maximum of 20 years.

Amortization of goodwill can be used as the device for handling income smoothing. This is due to AAS 18 also requires that depreciation policy should be reviewed at each balance sheet date and adjustments must be made when necessary. This means that administration is authorized to cancel goodwill whenever you want.

Approach adopted in Declaration of Australia is cost of principles. Under historical cost accounting, assets must be recorded in price paid for them. Therefore, acquisition should be recorded at cost. When cost exceeds fair value of identifiable net assets acquired is assumed that excess represents the goodwill payment. These may be inherent to business entity to be acquired or can be created as the result of combination.

One of problems that arise from cost principle is lack of consistency between internally generated goodwill and goodwill. Concept of goodwill is same regardless of how it is acquired and therefore no theoretical justification for different accountability. Example given by AAS 18 on identifiable assets include market share, advertising, good labor relations and senior management and staff. Normally it is not possible to relate future benefits of these assets to private costs and therefore are not recognized in accounts. Differences in accounting treatment of internally generated goodwill and may cause reduction of comparability between financial statements of companies that have grown internally and those who grow for acquisition of other entities.

Other arguments have been used against recognition of goodwill as an asset. Catlett and Olsen (1968) argued that goodwill has no separate existence after acquisition, you can not change itself and merge with total goodwill. Salas (1996) suggested that goodwill is an asset that belongs to owners of an entity rather than institution itself. Those who do good will regard as an asset that belongs to entity submits that different characteristics inherent in good will are not relevant. That represents the payment for future benefits mean that, in accordance with principle of costs must be recorded as an asset. There are, therefore, conceptual arguments for both views. They depend on one's own interpretation of what actually is an asset and what cost principle should always be referred.

It can be argued that to record goodwill as an asset and amortize it is likely to diminish usefulness and comparability of financial statements. Goodwill is amortized at same time, factors that give rise to internally generated goodwill, also are expensed, resulting in double counting. Companies with trade funds report more active and less income than has been developed internally. Moreover, amount of depreciation depends on depreciation policy chosen by company.

This study examines desirability of eliminating amortization of evidence of market valuations of goodwill, both as originally booked and further deterioration. Exposure Draft (ED) issued prior to adoption of SFAS 142 conditions stated that could indicate an initial overestimation of goodwill and also describes conditions that need to be reviewed for impairment in subsequent years (Financial Accounting Standards Board, 1999). Although this list of conditions was not included in final rule provides evidence FASB elements into account in drafting new standard. As such, these elements are basis of my analysis of market valuation of goodwill.

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

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

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

In U.S., amortization of goodwill is necessary and in June 1999, maximum repayment term is 40 years, but it is proposed that limit is reduced to 20 years with rebuttable presumption of ten years.

New Zealand and Canada. In June 1999, no significant changes in accounting standards in these countries as stated in our earlier discussion.

International. One of main problems faced by IASB is that in some countries, other internationally recognized "standard is being favored by ISA. Hence in 1998, IASC revised IAS 22. In revised standard, which continues to call for strict approach and capitalize on goodwill amortization. Depreciation is still required, but repayment period may exceed 20 years subject to review for impairment (see Table II).

THE Malaysian perspective

Located in perspective of modern world business, goodwill and other intangible assets are required to be increasingly important as companies increase their forces around technological and human assets. In current era of information and communication technology, intangibles of various kinds are gradually replacing tangible physical assets as critical success factors for many companies today.

This section is an adaptation of one of each item on counter in Malaysia written by Tan (1992).

First attempt to standardize accounting of goodwill that was made in July 1987. THE joint discussion paper on this subject was issued by Malaysian Institute of Accountant (MIA) and Malaysian Association of Certified Public Accountant (MACP). Comments were collected as members, companies, companies listed on Kuala Lumpur Stock Exchange, regulatory bodies and agencies and other organizations.

An analysis of responses indicates that there was clear support for recommendation of discussion paper purchased goodwill to be written off in year of acquisition. In addition, the majority agreement that if goodwill is not removed from reserves, which is amortized against earnings before taxes during its economic life.

As expected, main area of disagreement lies in defining amortization period. While about half of respondents were in favor of any final repayment period prescribed, other responded in support of the maximum of five to 20 years of being favored in general.

As analysis of responses indicated proposal for the combination of accounting policies (with the clear description in notes to account) was favored by most respondents, but with the significant degree of opposition.

Comments on this proposal indicate that supporters of proposal stressed that different acquisition, especially in different industries, different accounting treatments deserve.

Opponents of proposal, expressed concern that flexibility would lead to abuse or at least lack of comparability between accounts, which undermines fundamental purpose of rule. At the minimum, if two methods are allowed, some respondents recommended that clear guidelines should be established as to what method should be used under what circumstances.

Unfortunately, this discussion paper only ended at stage of draft, and received various responses from public. In 1980, with rapid growth of corporate sector in Malaysia, issue of goodwill arises again. Tan (1992, 1997) noted that "franchises and patents have been bought and sold, concessions and tolls have appeared in corporate annual accounts, and more recently, willingness to have significant quantities acquisitions reported gambling and banking. " In early 1991, MIA and MACP again debate the revised paper on accounting for goodwill, suggesting that goodwill should be recognized as an asset, but internally generated goodwill should not be recognized. It suggested two options in treatment of goodwill, capitalization and systematic amortization or capitalization as the standing item to periodic review.

Although debate has been going on regarding issue of good will, not much has been done to establish standard of good will. No effort is being taken to examine current state of art practices between firms in Malaysia. Method of accounting for goodwill is so flexible that sometimes we tend to question validity of this flexibility, especially in terms of achieving comparability of financial statements. This led to abuses in accounting for goodwill, which is "buy contaminated" (Kam, 1990) used for business combinations. Many companies use lower book value of net assets instead of using fair value of net assets acquired in allocation of consideration, resulting in the figure of great goodwill balance. This allows company to reduce its charges for depreciation and lack of goodwill amortization. Basic problems in both accounting treatment of goodwill is that use of immediate termination method, could result in depleting capital base of entity, thereby distorting its debt position. Depreciation method on other side seriously reduces reported earnings and earnings per share, which are major market indicators for companies.

Chapter V: Conclusion

Test result of initial market assessment of goodwill on basis of guidelines included in emergency department prior to issuance of SFAS 142. Initial deterioration weak evidence is found only on one condition: when purchase is made through payment of shares of acquirer. In general, results provide evidence that goodwill is not generally overvalued when initially recorded; supporting assertion that amortization is not justified.

Also try later evaluation of market goodwill with guidelines of erectile dysfunction. In contrast to results of initial impairment, goodwill is subsequently impaired in two situations: when there has been the significant decrease in share price from date of acquisition, and when book value of assets is greater than market value of equity. Although SFAS No. 142 does not specifically identify these impairment events, which are easily, measurable by auditors and may be useful tools for detecting deterioration.

Ultimate goal is to provide financial information to financial statement users with useful information for decision making. Accounting earnings may not reflect reductions in value of goodwill. Resulting overstatement of assets and net income violates conservative accounting practices. SFAS No. 142 attempts to remedy this. Despite limitations, as correlation omitted variables are inherent to design of relevant research value, it seems that events are associated with deterioration in stock prices. Thus, users of financial statements should be careful when valuing the company between reporting dates. General decision of FASB to eliminate periodic amortization of goodwill and instead of requiring the reduction deterioration seems to be supported by results of this study.

Management approach and disability

Shift from historical cost accounting to fair means the greater freedom to manage real value of an asset. In addition, issues such as lack of liquidity in asset prices or volatility of asset prices confuse issues of what is current price of an asset. If observable prices are not available in an active market, current rules allow agency to estimate value of an asset. Rees et al. (1996) highlights fact that management's estimate of fair value can determine amount of an asset of reduction due to absence of quoted market prices for many specific assets of company. Impairment is therefore subject to manipulation and may be unreliable due to estimation of direction (Bloom, 2009).

Irrelevance lack of reliability and value of accounting numbers may therefore be the problem that is the direct consequence of incentives of direction of any bias in measuring value of assets (Holthausen and Watts, 2001). This approach has the much more significant impact on estimated value of intangible assets rather than tangible assets.

Cancellation of decision is also the compensation for managers between recording certain current goodwill impairment charges below commercial line, and facing uncertain future impairment charges included in income from continuing operations (Beatty and Weber, 2006). In other words, there may be the balance between reliability and relevance to application of fair value accounting. This is confirmed by Dahmash et al. (2009) as information about goodwill and intangible assets is an important value, but unreliable.

However, some studies provide evidence that managerial discretion on treatment of intangible assets is beneficial because reduction in errors or prejudices those intangible assets are recorded Jennings et al. (1996), Choi et al. (2000) and Godfrey and Koh (2001). This suggests an improvement in reliability that managers can use to convey their view private information on value of assets of company.

Another issue is not only complaint of disability, but timing, magnitude and presentation of amortization of all who are determined by management. Riedl (2004) and Henning et al. (2004) specifies that discretion over timing of amortization increased after SFAS 142, because rules allow administrators to more easily justify their reporting options. This therefore creates the major problem as there is considerable evidence that when accounting rules allow administrators to exercise his view, earnings management is more likely to occur (Healy and Wahlen, 1999, Nelson et al, 2002; Nelson, 2003).

Many studies have found the relationship between impairment of goodwill and revenue management, as well as changes in management strategy (Hambrick and Fukutomi, 1991, Barnett and Tichy, 2000, Miller and Shamsie, 2001; Ganes-Ross, 2002). For example, the new CEO has an incentive to lower earnings at beginning of its mandate to better performance in their management more affordable (Pourciau, 1993). Sevin and Schroeder (2005) found significantly lower scores in year of deterioration that occurs in connection with those who do not perform impairment, which is evidence of bath management of large profits. Similarly, Master-Stout et al. (2008) found that CEOs tend to decide to recognize impairment of goodwill at beginning of his term so they can blame previous management team. Moreover, future earnings tend to look better for initial expenses. In other words, impairment of goodwill that seems to be used largely as the tool for revenue management.


Intangible assets, and in particular, willingness of business combinations are an increasingly important element of consolidated balance sheets published. Although now considerable uniformity in accounting standards as the result of global movement towards IFRS, in practice, different cultural and regulatory incentives and carry less comparable to what would be case. These problems are also exacerbated by both management level approach that offers administrators in current accounting standards, and agency-company conflicts.

Nowhere is this more evident than in case of accounting for goodwill. This is probably due to two main reasons: First, growing importance of goodwill of acquisitions to value of company in general. For example, in 2008 net assets of Royal Bank of Scotland were 91.5 billion pounds. However, total goodwill recorded on balance sheet is estimated at £ 48500000000 by more than 50 percent of net assets of company. Subsequently, RBS had to cut value of its assets by £ 28 billion, of which 20 billion pounds was result of goodwill impairment. Secondly, which combines uncertainty and administrative discretion, decisions by asset impairment appear to be largely driven by concerns smoothing. In general, empirical results of research in this area suggest that performance of companies has been watered down, so underestimate true underlying volatility of corporate business operations. In particular, it appears that management is particularly resistant to asset impairments recognized, despite several recent decisions of deterioration, for example, Vodafone recent losses and gains of several million pounds of goodwill (which already had written off £ 26,000,000,000 in 2006) are derived from its acquisition of Mannesmann in 2000, suggest that managers may be increasingly willing to use financial crisis and market downturn to write at length on goodwill reported poor procurement longstanding.

Outlook goodwill accounting: future

In future, definition of identifiable net assets may not apply more. For example, we can now see emergence of online shopping concept whereby the company exists only in cyberspace. This online store has no identifiable asset. This will lead to increasing importance of intangible assets. Value of company is mainly based on value of intangible assets primarily emerging intellectual capital, their accounting treatment and reporting in knowledge economy. Therefore, need to recognize internally generated goodwill is more critical. At present, there is recognized internally generated goodwill. This means that problem will arise with respect to this issue in future.

At this time, we see that consumer tastes and preferences change quickly. Consumer demand for new products all time. Something you are looking for can now be obsolete in the few months. For example, things that have very short life are like clothes, hand phones and computers. According to Nelson (1953), goodwill includes customer lists, organization expenses, development costs, trademarks, trade names and trademarks, secret processes and formulas, patents, copyrights, licenses, franchises and powers over income. Therefore, willingness to agree to trademarks, copyrights, trade names and trademarks, etc. may not apply in future changes in consumer tastes even faster.

Besides that, in future, may not have the monopoly industry. For example, in Malaysia, we see that the lot of industries is going for perfect competition. One test, more than one telephone service provider side of Telekom Malaysia, as Maxis, Digi, etc. Therefore, willingness to deal with higher powers to win might not be applicable in future.

From our analysis, we can see that problem of goodwill is not the new problem. In fact, academics and researchers have discussed since 1890's. However, until now there is still no obvious solution to this problem. In 1980 and 1990, we see that there are still many controversies on valuation of goodwill and on appropriate accounting treatment of goodwill.

At dawn of new millennium, it is important that accounting profession and competent authority takes necessary steps to put issue of willingness to rest once and for all. issue of goodwill has been long enough. Therefore, it is time for all parties concerned to work together to find the solution to this problem that everyone agrees. This is important in contributing to the greater uniformity in accounting for goodwill and allows comparability to be made. Besides that, it is expected that disputes about good will be minimized. To find the rational solution to issue of goodwill, other aspects of accounting, such as mark of accounting, taxation and fusion need to be reviewed. Emergence of intellectual capital, its accounting and reporting add considerable importance and there is an urgent need to solve problems of accounting for goodwill.

Internationally, duty of finding the solution to problem of goodwill will greatly reduce shoulder of International Accounting Standard (IASC). IASC should fulfill its mission is to promote improvement and harmonization in world of accounting regulation, standards and procedures. THE strong solution to treatment of goodwill should be made by IASC and they need to ensure that countries comply with rules to improve standardization of practices between countries.

Currently, Malaysian Accounting Standard Board (MASB) is in midst of preparing the standard for goodwill. Hopefully, MASB will come up the solution to resolve issue of goodwill, relevant to IASC standard of good will, but adapted to context of Malaysia.

Finally, it is also important to note that accounting treatment of goodwill should be reviewed from time to time to see if new issues of goodwill arising and to revise rule to current accounting requirements.