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Some mergers and acquisitions (M&as) did not generate any goodwill because they were accounted for using the pooling-of-interests method. In 1969, Leonard M. Savoie (then Executive Vice President of the AICPA) stated that he expected the then-prevailing accounting pronouncement authority, the Accounting Principles Board (APB), to abolish the pooling of interests method. However, the death-knell for this accounting method was not sounded until 2001 with the issuance of SEAS No. 141. Thereafter, whenever the purchase price of an acquisition exceeds the fair market value of the acquired company's net assets, the assignment of cost to goodwill is mandatory. (26)

According to Hake (2004), although the presence of goodwill on a balance sheet represents an expectation of higher profit, there is a cost associated with its accumulation: "Because goodwill is currently treated as a nonregenerating asset, accounting practice requires that it be removed from the balance sheet as it depreciates. The consequent depreciation of goodwill results in a direct charge against a firm's annual earnings. Given the difficulties in measuring goodwill, recent practice has been a straight-line amortization over a maximum forty-year horizon" (Hake 389). This author and others reviewed suggest that it is reasonable to assume that most observers would agree that goodwill is unlikely to depreciate as predictably as hard goods; however, this precept has previously been accepted as a viable solution to the problem of accounting for goodwill. In sum, "According to this logic, goodwill doesn't last forever, and it doesn't evaporate immediately upon acquisition" (Hake 389). According to Hake, an alternative to the earnings drain of goodwill is the pooling method of acquisition: "By merging the two firm's balance sheets, there is no recording of the acquisition price minus the target's numerable assets. The effect is no recording of goodwill, no drain on earnings. This practice was most common among firms with high market valuations relative to tangible assets (e.g., three MBAs and a laptop) because the charges needed to depreciate goodwill would be ruinous to earnings" (390).

A comparison of how goodwill is treated by the U.S. And several European countries is provided in Table 1 below.

Table 1.

Comparison of International Goodwill Treatments.



Period of Time

United States


Life with maximum of 20 years

United Kingdom

Life with maximum of 20 years

Germany under HGB, maximum life is 15 years; coder DRS only amortization over a maximumof 20 years


Life with maximum of 10 years; rebuttal presumption to 20 years

Source: Massoud and Raiborn 27.

Table 2.

Comparison of International Goodwill Treatments for Impairment.



United States

Yes: review annually and write off where necessary


Impairment review exception included

United Kingdom

Impairment review exception included


HGB (German Commercial Code) requires an annual impairment test; it is currently unclear whether the DRS (German Accounting Standard) is entitled to eliminate legal options


Impairment review exception included

Source: Massoud and Raiborn 27.

Although discussions of accounting for purchased goodwill are certainly not now, they have assumed some new importance and relevance in recent years (and months) as the march towards international convergence in accounting continues. For example, in his chapter, "New Accounting for Goodwill: Application of American Criteria from a German Perspective," von Colbe (2004) reports that the Financial Accounting Standards Board (FASB) published its revised exposure draft on accounting for business combinations and intangible assets in February 2001, followed on June 29, 2001, by Statement of Financial Accounting Standards (SFAS) 141 "Business Combinations" and SFAS 142 "Goodwill and other intangible assets" (201). The introduction of these new standards meant that the FASB eliminated the pooling-of-interests method of acquisition accounting and substituted the so-called impairment-only approach to goodwill accounting for the previously mandatory amortization of this intangible asset (von Colbe 201). The new standards resulted in heated controversy in Germany concerning the compatibility of the impairment-only approach to goodwill arising in acquisitions with traditional rules and legal regulations of accounting and on its usefulness for investor decision-making (von Colbe 201).

A few months later, the German Accounting Standards Board (GASB), the German standard-setting body, promulgated its exposure draft No. 1a on the compatibility of SFAS 141 and 142 with accounting directives, issued by the European Economic Community (EEC); at that time, the GASB announced that despite of the fact that EEC directives require amortization of goodwill within four years following the acquisition or over its useful life, group accounts prepared according to internationally accepted accounting standards, including SFAS 141 and 142, were deemed consistent with the EEC directives (von Colbe 201).

The GASB maintained that, according to Section 292a HGB (Handelsgesetzbuch, the German commercial code that regulates accounting standards), listed corporations following U.S. Generally Accepted Accounting Principles (GAAP) were exempt from the obligation to set up group accounts in accordance with the regulations of the HGB (von Colbe 201). In their comments on exposure draft No. 1a, the majority of accounting academics denied its compatibility with the EEC directives and with German law, and questioned the usefulness of the impairment-only approach (vol Colbe notes that these comments are publicly available at (www.drsc.de.)(202).

Although some firms and professional associations were in favor of the proposals, others were skeptical concerning its legitimacy and the usefulness of the proposed approach to goodwill accounting; by contrast, von Colbe notes that the German Institute of Chartered Accountants (IdW) did not comment on this issue, but in the organization's comment on the FASB's revised exposure draft it had expressed.".. doubts whether the requirement not to amortize purchased goodwill can be based upon the argument that goodwill -- "in its entirety or to a large extent -- "is not a wasting asset" (2001: 164). Simultaneously, the GASB's standard No. 1a had been promulgated and affirmed by the German Ministry of Justice; as a result, von Colbe suggests that according to 342 HGB, it can be assumed that standard No. 1a is part of German generally accepted group accounting principles today (202).

In this regard, von Colbe cites Pellens and Sellhorn who found that some German parent companies, especially those listed at the NYSE and approximately 50% of those listed at the Frankfurt exchange's "Neuer Markt" segment, prepare their group accounts according to U.S. GAAP, in application of Section 292a HGB (Pellens and Sellhorn 2001: 1681-9); it is quite likely, though, that the International Accounting Standards Board (IASB) and the British ASB will to some extent follow the example of FASB by banning goodwill amortization in the future (von Colbe 201). According to this author, "When we observe the frequent changes made to goodwill accounting rules in the United Kingdom (and not only there), we can conclude: 'If history is any guide, [the impairment only approach] is likely to last for a few years until its shortcomings are demonstrated by some future accounting scandal. At that point, whoever is setting standards at the time will no doubt revert to one of the previous treatments of goodwill. And so the wheel will continue to turn'" (Paterson 2002: 101 in von Colbe at 201).

IAS 39 (Recognising and Measuring Financial Instruments).

According to the financial analysts at Deloitte, Touche and Tohmatsu (2007), IAS 39 applies to all types of financial instruments, except for the following (IAS 39.2):

Interests in subsidiaries, associates, and joint ventures accounted for under IAS 27, IAS 28, or IAS 31; however IASs 32 and 39 apply in cases where under IAS 27, IAS 28, or IAS 31 such interests are to be accounted for under IAS 39 - for example, derivatives on an interest in a subsidiary, associate, or joint venture;

Employers' rights and obligations under employee benefit plans to which IAS 19 applies;

Contracts for contingent consideration in a business combination;

Rights and obligations under insurance contracts, except IAS 39 does apply to financial instruments that take the form of an insurance (or reinsurance) contract but that principally involve the transfer of financial risks and derivatives embedded in insurance contracts;

Financial instruments that meet the definition of own equity under IAS 32.

Important definitions in IAS 39 are provided in Table 3 below.

Table 3.

Important Definitions in IAS 39.9.



Financial instrument contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity

Financial asset

Any asset that is: cash; an equity instrument of another entity; a contractual right: to receive cash or another financial asset from another entity; or to exchange financial assets or financial liabilities with another entity under conditions that are potentially favourable to the entity; or a contract that will or may be settled in the entity's own equity instruments and is: a non-derivative for which the entity is or may be obliged to receive a variable number of the entity's own equity instruments; or a derivative that will or may be settled other…[continue]

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