recently, the United States has issued SFAS No. 41, “Business Combinations,” which
eliminates the pooling method and requires all business combinations to be ac-
counted for under the purchase method. This development is in line with the SEC’s
position in support of purchase accounting and similar developments at the IASB are
expected.
For transactions accounted for as purchases, the fair value of consideration paid
often exceeds the aggregate fair value of the identifiable net assets acquired. The dif-
ference is referred to as “goodwill.” The question of how to record this goodwill from
an accounting perspective is also an issue of considerable debate among accountants.
Some accountants believe that goodwill is a real, albeit nonidentifiable, asset; if it
were not, they argue, the acquiring enterprise would not have paid for it. However,
even among those who believe that goodwill is an asset, there is disagreement as to
whether the asset should be amortized and, if so, over what period of years.
Accountants in some countries take the position that, since goodwill is not a “real”
identifiable asset, it does not necessarily belong on the balance sheet. For example,
the United Kingdom permits companies either to write goodwill off directly against
reserves in the year of acquisition or to capitalize and amortize such amount. Many
believed that this accounting gives British companies an advantage in the merger and
acquisition arena, because income statements of British companies did not suffer
from the earnings drag impact of goodwill amortization in years subsequent to the ac-
quisition. Some British companies found difficulty in certain acquisitions, however,
in relation to absorbing substantial amounts of goodwill against reserves. As an ex-
ample of the continuing trend towards harmonization of accounting standards, this
special accounting treatment is no longer allowed under FRS 10, “Goodwill and In-
tangible Assets.” Under this new standard, goodwill and intangibles are now required
to be capitalized, as in most other countries, and may be either amortized over the
useful life, which is presumed not to exceed 20 years, or tested for impairment an-
nually if an indefinite life is used. In Germany, however, purchased goodwill may be
capitalized and amortized or charged to the income statement in the current period.
In the United States, under a recently issued standard, SFAS No. 142, “Goodwill and
Other Intangibles,” goodwill and indefinite lived intangibles should be capitalized
and tested for impairment at least annually, but should not be amortized. Impairment
is measured based on the asset’s fair value.
The recent severe downturn in technology and certain other stocks has seen im-
pairment write-downs under the new standards of unprecedented size.
(i) Consolidation. We will discuss accounting for long-term investments in equity
securities in this section. When one enterprise invests significantly in another enter-
prise, the investment can be accounted for in different ways. The two basic methods
used to record an investment are the equity method (accounting for the net invest-
ment in the investee as one line on the balance sheet) and the consolidation method
(adding all of the investee’s individual assets and liabilities to the company’s indi-
vidual assets and liabilities and backing out a “minority interest” for the percentage
of the net asset not owned by the parent company’s shareholders). In most countries,
the accounting rules require the equity method to be used when the investor can ex-
ercise significant influence over the affairs of the investee but cannot unilaterally
“control” the investee’s affairs. As a general rule, the standards specify that an in-
vestor that has approximately 20 to 50% ownership in another company meets this
criterion.
12 • 22 SUMMARY OF ACCOUNTING PRINCIPLE DIFFERENCES