Publication Date


Document Type


First Advisor

Avery, Clarence G.||Iliff, Kathryn (Professor of accountancy)

Degree Name

M.S. (Master of Science)

Legacy Department

Department of Accountancy


Accounting; Good-will (in business; etc.)


Statement of the problem. Investors, creditors, accountants, financial analysts, and other interested parties have been most concerned about the lack of consistency in financial reporting. It is their contention that, due to the many alternative accounting treatments that are permitted, there is lack of comparability in financial statements. Goodwill is one of the more important areas of accounting that is contributing to inconsistent reporting practices. This is a result of lack of uniformity in accounting for goodwill. The primary source of all the trouble involved in accounting for goodwill is that goodwill is very difficult to value at any point in time. To complicate matters further, a series of decisions must be made regarding the treatment of goodwill. It must be decided whether the goodwill is to be amortized systematically or adjusted through the use of lump-sum write-offs. If the decision is to amortize, then the question of whether the charges should be against current income or retained earnings arises. Methodology. All available literature pertinent to the subject of goodwill was perused. In addition, a series of discussions were held with faculty members and practicing members of the profession. Formal education and business experience also played a vital role in dealing with the subject matter. Conclusions. Goodwill is a very important income- producing asset. It is because of goodwill that a corporation is able to generate a profit which is superior to the normal rate of return on net tangible assets. It is customary not to record goodwill on the books unless It has actually been acquired in an arms’-length transaction. Therefore, goodwill is represented by assets which have never been recorded or have previously been written off as period costs. Since goodwill is so valuable an asset, it should always be given recognition on the books when it is part of a purchase. Use of the "pooling of interests” method of accounting for non-cash transactions should be avoided. This is because under that method of accounting goodwill value is completely ignored. Goodwill should always be systematically amortized and the amortization process should commence from the date of acquisition. Amortizing goodwill in this manner eliminates the need for determining the value of goodwill at subsequent dates for purposes of reflecting it at current value on the financial statements. More important, however, is the fact that the incremental earnings are a result of the goodwill. There definitely is a cost involved in the attainment of the additional earnings, and that cost is a reduction in the goodwill value over some period of time in the future. The simplest method of reflecting a reduction in the goodwill value is through the use of the amortization process. Goodwill amortization should never be charged to the retained earnings account. If there is to be a proper matching of revenues and costs, the amortization must be charged against current income. The earnings of the period are benefited by virtue of the goodwill and it is, therefore only proper that the amortization be matched against those additional earnings. From time to time there are situations where a lump-sum write-off of goodwill becomes necessary. If this Is the case, the write-off can be made to either current income or retained earnings depending upon the materiality. Usually, if the goodwill is being amortized, such a write-off can be avoided. Lump-sum write-offs of goodwill should never be made immediately after acquisition.


Includes bibliographical references.


v, 64 pages




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