Goodwill Accounting: A Review of the Literature

Abstract

In this paper we provide a review of the empirical literature on the accounting for goodwill. We focus on research undertaken since the introduction of the "impairment-only approach" of SFAS 141/142 and IFRS 3/IAS 36 (rev. 2004). We distinguish three areas of work. The first area comprises studies on purchase price allocations and the determination of goodwill. The second comprises studies that analyze whether goodwill should be interpreted as an asset, especially value relevance studies and studies on the predictive value of goodwill. The third area of research is the subsequent measurement of goodwill. Here, we discuss, inter alia, studies on the determinants and on the timeliness of goodwill impairments. Finally, we summarize findings on the influence of earnings management on goodwill accounting. Despite the multitude of studies, the available evidence does not allow for an unambiguous answer to the question whether the decision-usefulness of goodwill information has improved or deteriorated following the introduction of the impairment-only approach. One reason for this is that direct comparisons of the situations before and after the introduction are problematic because in the early period companies under US GAAP could apply the pooling-of-interests method, and in many European countries companies could set off goodwill to reserves. The paper closes with look at avenues for future research on goodwill accounting.