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Use The Effect Of Goodwill Amortization On The Usefulness Of Eps To Evaluate The Relationship Between Sfas No. 142 And Fasb Conceptual Framework

1995 words - 8 pages

Use the Effect of Goodwill Amortization on the Usefulness of EPS to Evaluate the Relationship between SFAS No. 142 and FASB Conceptual FrameworkAbstractIn 2001, the Financial Accounting Standards Board FASB approved significant changes in the way income is determined for combined business entities. In an effort to make Goodwill and other intangible assets accounting more transparent, SFAS No. 142, Goodwill and Other Intangible Assets, requires firms to stop Goodwill amortization. Obviously, SFAS No. 142 supersedes APB (Accounting Principles Board) Opinion No. 17, Intangible Assets. My research will focus on comparing earnings per share (EPS) before Goodwill amortization and earnings per share after Goodwill amortization as alternative indicators of share values for a random sample of listed firms over the period 1993-1998 from S&P 500. I find that EPS before Goodwill amortization is more accurate than EPS after Goodwill amortization as the indicator of share values, and that Goodwill amortization simply adds noise to investment analysis. These results testify that SFAS No. 142 matches the FASB conceptual framework better than APB Opinion No. 17.1.BackgroundGoodwill is the difference between a firm's total book net assets and the fair-market value of its identifiable net assets. The intangible asset represents the name of the firm, its reputation, competitive or other intangible advantages or resources that are expected to enable the firm to generate more earnings than normal return by its identifiable net assets . Goodwill may be developed internally by, for example, building customer loyalty, developing human resources, or utilizing assets more efficiently than competitors. Alternatively, Goodwill may be purchased "whole" when one firm acquires another.The pervious accounting treatment for Goodwill is governed by Accounting Principles Board Opinion No. 17--Intangible Assets. Under APB 17, Goodwill that is developed internally is not recognized as an asset. In contrast, the cost of Goodwill that is acquired as a result of a business combination should be recognized as an asset by the acquiring firm. APB 17 dictates that this asset, like other intangibles, must be amortized against revenues over "the periods expected to be benefited" up to a maximum of 40 years. Because Goodwill is recognized as an asset only when business acquisition occurs, Goodwill only shows up in consolidated financial statements under the rules of APB 17.2. Criticism of the APB Opinion No. 17The APB Opinion No. 17 that requires Goodwill be amortized over a maximum of 40 years had frequently been criticized by financial statement users and financial analysts before 2001. They argued that Goodwill amortization was unlikely to represent a company's current or future performance, so far as reduced the usefulness of EPS as an indicator of share values, although they noticed that Goodwill was an increasingly important economic resource for many companies and was an increasing...

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