Use the Effect of Goodwill Amortization on the Usefulness of EPS to Evaluate the Relationship between SFAS No. 142 and FASB Conceptual Framework

Essay by xfeng78University, Master'sA+, March 2004

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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

Abstract

In 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.Background

Goodwill 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...