Abstract
The treatment of goodwill, whether to capitalise or expense in the year of acquisition, has been a topic of debate over the last two decades. Since 1998, the Financial Reporting Standard (FRS 10) in the UK requires firms to capitalise purchased goodwill and amortise it through periodic charges to the profit and loss account rather than expense in the year of acquisition. The FRS 10 remained effective until 2003 and was since replaced by the International Financial Reporting Standard 3 (IFRS 3). The purpose of this study is to examine the association between purchased goodwill and market value of the firm by using a market valuation model that includes both balance sheet and income statement items after controlling for the valuation effects of other intangibles assets: research and development (R&D) and advertising. Empirical results suggest a strong positive association between capitalised goodwill and firm market value, after controlling for R&D and advertising.
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