Given the maelstrom evident in the conceptual sphere, it is perhaps unsurprising that considerable turbulence has long been clearly evident in the world of practice. Early editions of Montgomery’s Auditing2 finger goodwill as a favoured tool of watered stock fraudsters and their fellow travellers, suggesting widespread licentiousness including the capitalisation of operating losses to goodwill – on the spurious theory that these had been incurred for the future economic betterment of the enterprise in question.
Add a (dirty) pool, write off against reserves, incant extraordinary expense, invert the sum of the years digits, misallocate purchase consideration to identifiable intangibles, about face and channel away from these back to goodwill, trim cash generating unit populations, massage growth assumptions, compress discount rates. Round and round the cauldron go (Gibson & Francis, 1975; Wines & Ferguson, 1993; Day & Hartnett, 2000; Micallef & Eddie, 2001; Lonergan, 2006).
Yet in matters pertaining to the regulation of financial reporting, hope evidently springs eternal. Whatever had transpired historically, a clear break with the past was made when it became a requirement at law that International Financial Reporting Standards (IFRS) would in Australia be the required basis for the preparation of financial statements3 for all reporting periods beginning on or after January 1 2005. In many instances the transition to IFRS resulted in very little actual change. This was not so in the case of the new rules pertaining to goodwill accounting, which differed radically from their predecessors.
Consequently, informed by the turbulent history of goodwill accounting practice and theory, it is the objective of this paper to take the opportunity afforded by the emergence of the first substantial sample of financial statements prepared by large listed Australian companies under IFRS to peer into this brave (and complex) new domain with a view to forming an impression of its qualities.
In pursuing this objective, the remainder of this paper is structured as follows. Section 2 provides a brief review of key developments in the regulation of goodwill accounting and reporting in Australia to date. Section 3 sets out details of the data sample and research methodology employed. Section 4 consists of a discussion of the results of the study, while section 5 contains some conclusions and suggests some implications of this study for practice and potential further research.
2. OVERVIEW OF GOODWILL REPORTING ARRANGEMENTS IN AUSTRALIA
Although goodwill had figured as an element of financial reports in Australia for an extended period (Standish, 1972), no reporting standard dealing with goodwill existed in the jurisdiction until the issue in March 19844 of Statement of Accounting Standards AAS 18, Accounting for Goodwill, by the Australian Society of Accountants5 jointly with the Institute of Chartered Accountants in Australia6.
Prior to that time, an almost perfect regulatory vacuum surrounded financial reporting arrangements for goodwill in Australia, there being, in addition to a lack of accounting standards on the matter, no express requirements from other quarters such as stock exchange listing rules or the Companies Act. This set the Australian landscape at odds with the position in other jurisdictions, for example the United States, where pronouncements pertaining to goodwill had existed for several decades – for example, chapter 5 of Accounting Research Bulletin (ARB) 43, issued in 1953, or APB 17, issued in 1970. Consequently, prior to the advent of regulation in Australia, a melange of conflicting practices existed (Gibson & Francis, 1975). Evidently, that is how a substantial proportion of the reporting population liked things. AAS 18, calling as it did for the recognition and subsequent orderly amortisation of purchased goodwill against periodic earnings, was received with considerable indifference if not hostility by a significant proportion of Australian reporting entities, whose rate of compliance with the requirements of the new interloper was poor (Carnegie & Gibson, 1987). They had that luxury. AAS 18 did not enjoy the force of law.
It required the introduction of Approved Accounting Standard ASRB 1013 – Accounting for Goodwill, a standard backed by the force of law, to prod recalcitrant reporting entities into compliance. This standard, which required recognition and subsequent systematic amortisation of goodwill against periodic earnings, became effective for all reporting periods ending from June 1988 onwards (Wines & Fergusson, 1993).
Yet even with the promulgation of a standard on goodwill backed by law, the regulatory victory was rapidly hollowed by innovation in practice. A favoured technique for avoiding the earnings dilutive consequences of ASRB 1013 was to place aggressive valuations on identifiable intangible assets obtained in corporate acquisition transactions, thus diminishing the residual difference between purchase consideration and the fair value of net assets acquired via the transaction – and consequently, the value ascribed to goodwill on acquisition (Walker, 1989; Woolf 1989).
This form of regulatory arbitrage was possible because whereas a binding accounting standard existed in relation to goodwill, no standard governed reporting requirements for identifiable intangibles. Thus, while amortisation of goodwill against earnings was a requirement of ASRB 1013, no such express requirement existed in relation to identifiable intangibles. Value ascribed to these assets could therefore theoretically remain indefinitely untrammelled.
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