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Its Mission Is To Develop And Enforce A Single Set Of Global Accounting ...

Its mission is to develop and enforce a single set of global accounting standards, based on preparation of high quality, transparent and comparable financial statements for local and global users.
The IASB has been working on compiling a stable set of International Financial Reporting Standards (IFRS) for first time users. The IFRS became mandatory for all publicly listed companies in the European Union in 2005, and was also adopted by other advanced nations like Australia. The IASB has also been working very closely with the US Financial Accounting Standards Board (FASB), since 2002, to bring about convergence between US GAAP and the IFRS. However, significant work on harmonising IFRS with US GAAP has already occurred, and while some pending issues are currently under study for corrective action, the two systems are steadily approaching a state of convergence. It is notable that some European firms that have been using US GAAP but are now adopting IFRS report a relatively minor impact (Higson and Sproul, 2005) in their financial statements. It is the purpose of this essay to study the accounting treatment of goodwill under US GAAP and the IFRS, especially the developments of the last ten years, and analyse the reasons for the various changes, not only to assess the current situation, but also to determine what to expect in future.

2. Commentary

a. Goodwill under US GAAP

Goodwill is an intangible asset and represents the difference between the cost of an acquisition and the fair value of its identifiable assets, liabilities and contingent liabilities. A recent analysis by PricewaterhouseCoopers (PWC) estimates that intangible assets accounted for approximately 75 % of the purchased price of acquired companies in recent years. The histories of accounting treatment for goodwill in the US and UK have followed roughly similar paths even though developments have not occurred at the same time. In the past, i.e., prior to 2001, companies in the US could structure acquisition transactions using a choice of pooling-of interests or purchase accounting method.

The pooling of interest method for acquisitions and mergers allowed companies to refrain from distinguishing buyer and seller, and did not entail recording of the price of the acquisition. Goodwill valued by the company, in these circumstances, could be amortised in equal instalments over forty years. Changes occurred in the US accounting procedure with the issuance of two new accounting standards, 141 and 142. The pooling of interests method stood eliminated from June 30, 2001 and it became mandatory for all companies to use the purchase accounting method for all business accounting transactions. Requests from industry also led to the scrapping of the practice of amortising assets over forty years, especially by virtue of standard 142.


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