The issue of accounting treatment for goodwill was beginning during the year 1880-1929. The accounting of goodwill was emerged when the form of business was changed from sole proprietorship to corporations as according to Hughes, The development of goodwill was paralleled with the development of business enterprise. (Hughes, 1982) During that period, the useful life of goodwill has become a major accounting issue. Dicksee claims that goodwill was a permanent asset in balance sheet and an asset that is undesirable to retain, thereby he proposed to immediate write off to capital. (Dicksee & Tillyard, 1906) However, there are some writers who support the conservative approach which is goodwill should gradually amortized against its income. Dicksee’s argument is rejected by Hatfield on the ground of inconsistent with valuation methods based on the capitalization of a finite series of excess earning. (Hatfield, 1913)
Furthermore, during the year 1929-1959, the world is suffered by the Great Depression. Accounting Research Bulletin No.24 is favor towards conservatism and strengthening of accounting principles. Amortization supporter based their arguments in the historical cost principle and principle of matching cost with revenue gave them a crucial advantage as recognition of goodwill is prohibited by cost principle. (Garcia, 2006) Paton claims that goodwill is considered as cost that is presumably expiring and should be assigned to future revenues. (Paton, 1941) Moreover, the matching principle that was established requires goodwill to be amortized against its income. As Walker argued, goodwill should allocate to its income which is similar with the proportion of the cost of any other asset. (Walker, 1953) At this period, advocates for permanent retention have lost their priority against the amortization supporter.
A special type of mergers method, “pooling-of-interests” was broadly used during the period of 1959-1973 as a substitute for the immediate write-off. (Garcia, 2006) In addition, this method was used to account for business combination when two separate entities merged into one. It was accepted by the SEC at first, but later on members of accounting profession found that the pooling has had abolishing the accounting principle. (Kripke, 1961) As a consequence, the historical cost approach has strongly established and remained dominant in US until 2001. The method that write-offs of goodwill to retained earnings cannot be used during this period as it is prohibited by Opinions of the Accounting Principles Board No. 9.
During the period of 1973-2001, the accounting treatment was gradually switch from historical cost basis to fair value which is the balance sheet approach when Statement of Accounting Concepts No.7 was issued by FASB in 2000. (Garcia, 2006) However, the debate regarding the accounting for goodwill was continued due to lack of compromise until the SFAS no.141 was adopted. This standard was favor to impairment test than the...