7(a). Goodwill
Note: This section should be read in conjunction with section 8(b) on business combinations.
Leading view
The accounting treatment for purchased goodwill, that is, recognition as an asset and amortization over estimated useful life, should not be changed.
* Most users make adjustments for goodwill; the amortization charge is almost always added back to income because it is a noncash charge [p. 5-7, 10-11, 15- 18], while the goodwill asset is sometimes, but not always, deducted from equity [p. 5, 7, 9, 11, 15-16, 21]. Although they generally make those adjustments, users prefer retaining the existing accounting treatment for goodwill because:
* The information needed to make the adjustments is clearly disclosed (except in some cases where the amortization charge is aggregated with other charges [p. 14-15]) in the financial statements of the current year and the previous years (as opposed to being buried in stockholders' equity) [p. 7, 11-12, 16, 19, 21]
* The "excess" paid for a company is useful analytical information that should be preserved [p. 7, 11-12, 16-20]
* The unrecovered cost is generally included in ratios such as return on total assets and return on equity [p. 17-19].
The maximum amortization period of 40 years should be significantly shortened, at least to 20 years.
* 40 years is considered too long in today's economic environment [p. 4, 10, 12, 19, 21]
Self-developed goodwill should not be recognized as an asset.
* Although users acknowledge that recognizing only purchased goodwill as an asset results in a lack of comparability among companies [p. 2-3, 6-7], they oppose recognition of self-developed goodwill because of valuation difficulties [p. 3-5] and a desire to retain a transaction-based accounting system [p. 3- 5].
Alternative view A
Purchased goodwill should be written off directly against stockholders' equity at the date of purchase.
* The value of purchased goodwill is relevant only at a specific point in time (that is, at the date of the purchase transaction) and is not indicative of future cash flows [p. 1, 5]
* Immediate write-off against stockholders' equity would facilitate comparisons between companies that purchased goodwill and those that developed it [p. 2-3, 6- 7]
* Write-off against stockholders' equity rather than against earnings is preferred by users [p. 19- 20].
Alternative view B
Purchased goodwill should be recorded as an asset and not be amortized or written off unless permanently impaired.
* Goodwill does not necessarily depreciate systematically; in some cases, it might even increase in value over time [p. 13-14].
7(b). Other intangible assets
Leading view
The accounting treatment for purchased intangible assets, that is, recognition as an asset and amortization over estimated useful life, should not be changed.
* Users do not necessarily make adjustments for purchased intangible assets as regularly as they do for purchased goodwill [p. 7-8]
* Intangibles that are purchased individually should be recognized as assets because their purchase price has relevance to the value of expected future cash flows related to those specific intangibles [p. 6, 8].
The maximum amortization period of 40 years should be significantly shortened.
* The main reason is to get back as soon as possible to a comparable basis of accounting between companies that purchased intangibles and those that developed them internally [p. 5].
Self-developed intangibles should not be recognized as assets.
* The main reasons for that view are valuation difficulties and the lack of relationship between the costs of developing the intangible assets and the value of the expected future benefits arising from them [p. 5-6].
Alternative view
All intangible assets arising from contractual arrangements, and for which future cash flows can be estimated, should be capitalized as assets on the balance sheet at the present value of estimated future cash flows.
* This approach would recognize the increasing importance of intangibles in today's economic environment [p. 1-2, 4, 6] and would focus on an appropriate measure of economic value for analytical purposes [p. 6]. [Refer also to section 8(c) on accounting for leases and other executory contracts.]