There is a tussle going on over accounting for goodwill right now that would be regarded by some as a non-chemical treatment for insomnia, but, quite frankly, it is important and merits coverage.

So please don’t doze off. At least not just yet.

Let me introduce this short exploration with one of my favourite case studies because it demonstrates the point.

Back in what must be considered by some younger accountants as the dark ages of the Jurassic period there was a body called the Urgent Issues Group (UIG), created by the professional accounting bodies to assist with the interpretation of contentious matters.

A prominent UIG deliberation concerned goodwill and had at its heart an anti-avoidance measure that was a prescribed method of accounting for goodwill.

Goodwill was to be accounted for using a straight line basis over a period not exceeding 20 years.

This was done so that there was no creative license taken in the accounting for goodwill in specific circumstances. Everybody would have to do it the same. Equal dollops of goodwill being expensed to the bottom line over a set period.

The straight line method was arbitrary but it set a rule in place that disciplined accounting for goodwill for a period. Was it always going to give the right result? No. Did it always reflect the true value of purchased goodwill to an entity over time? No.

It meant that the accounting would be the same for that blob on the accounts that some cynics would see as being that amount you account for when you pay too much for something.

As one seasoned corporate accountant once remarked to me years ago: it doesn’t matter if what we do is wrong as long as we are all making the same mistake.

Ease of calculation using amortisation back in the ‘old days’ gave way to an impairment regime when the international accounting standards were adopted in Australia and elsewhere.

This meant that goodwill would only be subject to a write down and hit the bottom line if there were triggers that cause it to be assessed and written down if deemed to be impaired.

There is an interesting dilemma in this context, with some commentators pointing to the fact that the ability to leave goodwill relatively unscathed except when things are on the skids means goodwill could be overstated.

How so?

The argument being put forward by some folks is that companies know that they do not have to write down goodwill unless things go sour and that a lower amount is being attributed to assets acquired in a takeover, for example.

Goodwill in the case of this argument is then a tool for earnings management because loading up goodwill in an entity when times are good means there is probably one less expense hitting the bottom line on a regular basis.

I mentioned that the argument being presented by some people is that goodwill is overstated. A different way of putting the same proposition is that identifiable assets that will be subject to depreciation during their useful lives might be understated.

This