ABACUS, Vol. 45, No. 3, 2009
Accounting For Goodwill
This article provides a means of resolving one of accounting’s ongoing problems—how to account for goodwill in an era where the unidentiﬁable intangible asset is often an entity’s largest value component. Despite the general recognition that, in practice, the two classes of goodwill are indistinguishable in terms of their ability to generate streams of revenue, a distinction is traditionally drawn between internally generated and purchased goodwill. The former should not be brought to account because it is impossible to do so within the accepted rules of ...view middle of the document...
He had not, however, turned his attention to using the system to better account for goodwill. I was drawn to the research following some forty years as a professional accountant and auditor, during which time I became convinced that the conventional accounting treatment of goodwill was unsound in theory and of little use in practice. The proposal is limited to accounting for goodwill in the context of publicly listed entities, in particular those corporate entities included in the All-Ordinaries Index on the Australian Stock Exchange (ASX). It follows that it will exclude those companies involved predominantly in the mining and extractive industries, as the concept of goodwill, as normally understood, is not relevant to that category. There are no particularly Australian issues which would limit the applicability of the proposals and the general discussion to this country and the implication of the
Martin Bloom (MBloom@deloitte.com.au) is a Director in the Forensic Division of Deloitte.
© 2009 The Author Journal compilation © 2009 Accounting Foundation, The University of Sydney
A BAC U S
matters dealt with extends worldwide, particularly given the extensive adoption of International Financial Reporting Standards (IFRS). They are also consistent with U.S. GAAP.
THE OBJECTIVES OF FINANCIAL REPORTING IN RELATION TO INTANGIBLE ASSETS A shareholder in a listed company is typically remote from direct contact with the management of that company, and is reliant on information provided in the company’s Annual Report and the information furnished to the ASX, including sixmonthly interim ﬁnancial reports. It is intrinsic to such reports that they are prepared with the requirement of SAC 2, Objective of General Purpose Financial Reporting, in mind, that ‘The objective of general purpose ﬁnancial reporting is to provide information to users that is useful for making and evaluating decisions about the allocation of scarce resources’ (para. 26). Allowing for the organizational complexity that has developed since the point was made, this requirement was put equally well in 1788 by Hamilton:
Bookkeeping is the art of recording mercantile transactions in a regular and systematic manner. A merchant’s books should contain every particular which relates to the affairs of the owner. They should exhibit the state of all the branches of his business; the connection of the different parts; the amount and success of the whole. They should be so full and so well arranged as to afford a ready information in every point for which they may be consulted. (Quoted in Chambers, 1995, p. 338)
Two hundred years later, the International Accounting Standards Committee (IASC) put the same point succinctly: ‘To be reliable, the information in ﬁnancial statements must be complete within the limits of materiality and cost’ (IASC, 1989, p. 38). ‘Cost’, in this context, refers to the expense incurred in producing the ﬁnancial statements, not the limitations...