Accounting for Goodwill.

Abstract This article analyzes the goodwill issue within the framework established by the pronouncements of the United States Financial Accounting Standards Board (FASB). The measurability criterion has been clearly established as one of the main principles of asset recognition by the FASB and should be given primary consideration in the selection of a method of accounting for goodwill. There is a problem of uncertainty of future benefits when acquisitions involve purchase prices based upon management's judgment regarding synergistic possibilities. Extensive efforts to identify the elements of the purchased intangibles may reduce the amount of the unidentified portion that has commonly been labeled as goodwill, but will not eliminate it. Application of the measurability criterion to business combinations suggests that this residual amount must not be capitalized. Direct write off of goodwill against equity produces minimal impact on the income-to-total assets and a modest impact on the debt-to-equity ratios of the companies included in our sample. However, one must note that even this modest impact is overstated. For approximately 40 percent of the observations, goodwill is not separately identified but is included with other intangibles in the other assets category. Therefore, the amount of time and effort spent by the profession to resolve the debate on whether or not to capitalize goodwill must be in proportion to the relatively small economic consequence of this problem.