The Debate Over Subsequent Accounting for Goodwill

This paper evaluates whether alternative methods of subsequent accounting for goodwill result in accounting numbers that are significantly different from previous methods prescribed by standard setters. Financial statement users have identified significant flaws in both the amortization-and-impairment and impairment-only methods of subsequent accounting for goodwill. In this paper, we (1) summarize the current debate over subsequent accounting for goodwill, (2) empirically examine the decline in goodwill value under the amortization-and-impairment and impairment-only regimes, and (3) empirically investigate whether there are alternative methods that result in significantly different rates and patterns of decline in the value of goodwill (and thus have the potential to address the identified weaknesses of each method). We conclude that the proposed alternative methods provide markedly different patterns and periods over which goodwill is written off and, therefore, have the potential to provide a more faithful representation of the economics of goodwill.