Goodwill

Viewpoints

Why Not Eliminate Goodwill?

by L. Todd Johnson and Kimberley R. Petrone,

Financial Accounting Standards Board

If the pooling-of-interests method of accounting for business combinations (pooling method) is to be eliminated1 and the purchase method is used to account for all combinations, many have argued that any goodwill arising under the purchase method also should be eliminated—or at least that its effects on the income statement should be alleviated somehow. Doing so would temper the effects of eliminating the pooling method and constitute a major change in how the purchase method is applied.

1The reasons for the FASB’s decision to eliminate the pooling method are discussed by the authors in another Viewpoints article, “Why Eliminate the Pooling Method?” FASB Status Report No. 316, August 31, 1999.

Unlike the pooling method, the purchase method records the values actually exchanged in business combination transactions and the subsequent consumption or diminution of those values. Goodwill often is one of the most significant items recorded in accounting for those transactions, and it therefore is the lightning rod for objections to the purchase method. Those objections relate to the requirement to record goodwill as an asset and particularly to the requirement to amortize it against reported earnings in subsequent periods.

In its deliberations of the issues in the business combinations project, the Board considered an array of arguments that have been made for eliminating goodwill or alleviating its effects. Those arguments range from ignoring goodwill to keeping any charges associated with it out of the income statement or reporting measures of “cash earnings.” What did the Board conclude about those arguments?

“Goodwill Should Be Ignored”

The argument that goodwill should be ignored in accounting for business combinations is predicated on the notion that goodwill constitutes the primary difference (although not the

only...