| Pub. Date | : October, 2021 |
|---|---|
| Product Name | : The IUP Journal of Accounting Research and Audit Practices |
| Product Type | : Article |
| Product Code | : IJARAP401021 |
| Author Name | : AV Vedpuriswar* |
| Availability | : YES |
| Subject/Domain | : Finance |
| Download Format | : PDF Format |
| No. of Pages | : 8 |
Goodwill is an intriguing and often large asset on the balance sheet of many Fortune 500 companies. The definition of goodwill and its accounting treatment have always been the subject of intense debate. This debate has gathered further momentum as in 2020, publicly listed US companies wrote down the largest amount of goodwill in more than a decade (Maurer, 2021). The subject is also gaining attention because the US accounting standards authorities are contemplating changes in the way goodwill is accounted for, i.e., moving back from impairment accounting to amortization. This research note, written primarily from a US accounting standards perspective, looks at how goodwill accounting has evolved over time and what lies ahead.
The Importance of Goodwill
In recent years, goodwill has become
important both in terms of the value reported
and the quantum of write-offs. As the
Economist (2018) reported, total goodwill for
all listed firms worldwide was $8 tn,
compared to $14 tn of physical assets.
According to the authors, the majority of the
top 500 European and the top 500 American
firms by market value, had one-third or more
of their book equity tied up in goodwill. At
the same time, for these firms, cumulative
goodwill write-offs over the past ten years
had amounted to $690 bn.
Major goodwill write-offs can lead to sharp
fall in share prices. On January 19, 2009,
Royal Bank of Scotland's shares collapsed as
the British government raised its stake
(Economist, 2009). The troubled bank said it
would report Britain's largest-ever corporate
loss after an impairment charge on its takeover
of ABN AMRO. Regions Financial, an
American bank, lost a quarter of its value on
January 20 after taking a $6 bn goodwill charge
on its $10.5 bn purchase of AmSouth
Bancorp.