Rachel Hartong Professor Johnson ACCT 301 Research Paper Nov. 30, 2011 The Development of Goodwill Impairment and Its Current Effects

The business world of the 20th and 21st centuries is one that has become more and more susceptible to mergers and acquisitions. As a result of the industrial revolution, and the more recent technological revolution, some firms were, and continue to be, able to gain the competitive advantage over competitors, leading to their acquisition (Hughes 16). With the increase of business acquisitions, there was a need to reexamine old accounting principles in order for the transactions to be properly recorded; this accounting is known as goodwill accounting. The concept of goodwill accounting has surprisingly been present for over a hundred years, first appearing around the 1880’s (1). Since its creation however, goodwill accounting has been a source of debate and controversy due to its adverse effects on the net income of numerous firms. Goodwill accounting has undergone recent revision by the FASB, specifically in the area of goodwill impairment. The purpose of this paper is to examine the history of goodwill accounting, the initial amortization method and revised current method of testing for impairment, and the needed, yet sometimes detrimental effects this accounting has had on several high-tech industrial firms. Without proper accounting for goodwill impairment, several firms would have the ability to overstate their net earnings and destroy the reliability of the financial statements in the eyes of investors.

To understand the history and need for goodwill accounting and impairment, one must start with a definition of the concept. According to the Intermediate Accounting text by Stice, “goodwill is best thought of as a residual amount, the amount of the purchase prices of a business that is left over after all other tangible and