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Accounting for goodwill: an examination of factors influencing management preferences

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  • Pelham Gore
  • Fauziah Taib
  • Paul Taylor

Abstract

This paper investigates factors that influenced the position of managements of UK-listed companies in the heated debate that surrrounded proposals for a new standard on goodwill accounting, i.e. the factors influencing whether managements preferred immediate write-off or capitalisation-based approaches. The factors investigated are derived from contracting cost theory, and include those associated with debt covenant restrictions and profit- based management schemes. They also include non-agency contracting costs. A key feature of the design is that, compared to prior research, we specify more rigorously circumstances where such contracting cost effects are, or are not, likely to be binding. In addition, the paper investigates the effects on management preferences of their beliefs about revisions in market perceptions of their companies resulting from changes in goodwill accounting. Our results support certain contracting cost-based hypotheses, but they also indicate that management beliefs about changes in market perceptions of their companies constitute a strong influence on their preferences.

Suggested Citation

  • Pelham Gore & Fauziah Taib & Paul Taylor, 2000. "Accounting for goodwill: an examination of factors influencing management preferences," Accounting and Business Research, Taylor & Francis Journals, vol. 30(3), pages 213-225.
    • Handle: RePEc:taf:acctbr:v:30:y:2000:i:3:p:213-225
    DOI: 10.1080/00014788.2000.9728937
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    References listed on IDEAS

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    1. Ayres, Frances L., 1986. "Characteristics of firms electing early adoption of SFAS 52," Journal of Accounting and Economics, Elsevier, vol. 8(2), pages 143-158, June.
    2. Mary E. Barth & Greg Clinch, 1996. "International Accounting Differences and Their Relation to Share Prices: Evidence from U.K., Australian, and Canadian Firms," Contemporary Accounting Research, John Wiley & Sons, vol. 13(1), pages 135-170, March.
    3. Chauvin, Keith W. & Hirschey, Mark, 1994. "Goodwill, profitability, and the market value of the firm," Journal of Accounting and Public Policy, Elsevier, vol. 13(2), pages 159-180.
    4. Dunne, Kathleen M., 1990. "An empirical analysis of management's choice of accounting treatment for business combinations," Journal of Accounting and Public Policy, Elsevier, vol. 9(2), pages 111-133.
    5. Duke, Joanne C. & Hunt, Herbert III, 1990. "An empirical examination of debt covenant restrictions and accounting-related debt proxies," Journal of Accounting and Economics, Elsevier, vol. 12(1-3), pages 45-63, January.
    6. Healy, Paul M., 1985. "The effect of bonus schemes on accounting decisions," Journal of Accounting and Economics, Elsevier, vol. 7(1-3), pages 85-107, April.
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    Cited by:

    1. Beattie, Vivien, 2005. "Moving the financial accounting research front forward: the UK contribution," The British Accounting Review, Elsevier, vol. 37(1), pages 85-114.
    2. Araceli Amorós Martínez & José Antonio Cavero Rubio, 2018. "The Economic Effects of IFRS Goodwill Reporting," Australian Accounting Review, CPA Australia, vol. 28(3), pages 309-322, September.
    3. Georgios Voulgaris & Konstantinos Stathopoulos & Martin Walker, 2015. "CEO Pay Contracts and IFRS Reconciliations," European Accounting Review, Taylor & Francis Journals, vol. 24(1), pages 63-93, May.
    4. Martin Bugeja & Anna Loyeung, 2017. "Accounting for business combinations and takeover premiums: Pre- and post-IFRS," Australian Journal of Management, Australian School of Business, vol. 42(2), pages 183-204, May.

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