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Assessing the Value of Growth Option Synergies from Business Combinations and Testing for Goodwill Impairment: A Real Options Perspective

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  • Francesco Baldi
  • Lenos Trigeorgis

Abstract

Goodwill is an intangible asset, and therefore hard to measure and difficult to account for. This article argues that the two-stage impairment test for acquired goodwill under SFAS 142 has several limitations. Most important, it measures aggregate rather than acquired goodwill, making it very difficult to separate acquisition-related goodwill from aggregate enterprise goodwill after a business combination. As a consequence, any potential deterioration of acquired goodwill value could be concealed by increases in internally generated goodwill. Copyright Copyright (c) 2009 Morgan Stanley.

Suggested Citation

  • Francesco Baldi & Lenos Trigeorgis, 2009. "Assessing the Value of Growth Option Synergies from Business Combinations and Testing for Goodwill Impairment: A Real Options Perspective," Journal of Applied Corporate Finance, Morgan Stanley, vol. 21(4), pages 115-124.
  • Handle: RePEc:bla:jacrfn:v:21:y:2009:i:4:p:115-124
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    1. repec:bla:joares:v:38:y:2000:i:2:p:375-386 is not listed on IDEAS
    2. Bradley, Michael & Desai, Anand & Kim, E. Han, 1988. "Synergistic gains from corporate acquisitions and their division between the stockholders of target and acquiring firms," Journal of Financial Economics, Elsevier, vol. 21(1), pages 3-40, May.
    3. Stewart C. Myers, 1984. "Finance Theory and Financial Strategy," Interfaces, INFORMS, vol. 14(1), pages 126-137, February.
    4. Holthausen, Robert W. & Watts, Ross L., 2001. "The relevance of the value-relevance literature for financial accounting standard setting," Journal of Accounting and Economics, Elsevier, vol. 31(1-3), pages 3-75, September.
    5. Anne Beatty & Joseph Weber, 2006. "Accounting Discretion in Fair Value Estimates: An Examination of SFAS 142 Goodwill Impairments," Journal of Accounting Research, Wiley Blackwell, vol. 44(2), pages 257-288, May.
    6. Ramanna, Karthik, 2008. "The implications of unverifiable fair-value accounting: Evidence from the political economy of goodwill accounting," Journal of Accounting and Economics, Elsevier, vol. 45(2-3), pages 253-281, August.
    7. Mary Barth, 2006. "Including estimates of the future in today's financial statements," BIS Working Papers 208, Bank for International Settlements.
    8. repec:bla:joares:v:34:y:1996:i::p:117-134 is not listed on IDEAS
    9. Churyk, Natalie Tatiana, 2005. "Reporting goodwill: are the new accounting standards consistent with market valuations?," Journal of Business Research, Elsevier, vol. 58(10), pages 1353-1361, October.
    10. repec:eee:crpeac:v:19:y:2008:i:8:p:1370-1383 is not listed on IDEAS
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