Bad Will: Why the FASB's Proposed Fix of Goodwill Accounting Will Not Fix the Goodwill Problem

• Date: 01 October 2016
• Published date: 01 October 2016
• Author: Michael Cipriano
• DOI: http://doi.org/10.1002/jcaf.22194

89

© 2016 Wiley Periodicals, Inc.

Published online in Wiley Online Library (wileyonlinelibrary.com).

DOI 10.1002/jcaf.22194

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Bad Will: Why the FASB’s Proposed Fix

of Goodwill Accounting Will Not Fix the

Goodwill Problem

Michael Cipriano

When an individual pays

$300,000 for a house

worth only $240,000,

we tend to call that individual

a loser to the tune of $60,000.

However, when an acquiring

company pays more for a tar-

get company or business unit

than it is worth, the Financial

Accounting Standards Board

(FASB) calls it goodwill. The

FASB views this markup

above the market value of

recognized net assets acquired

as an asset “representing the

future economic benefits aris-

ing from other assets acquired

in a business combination”

(ASC 350-20-20). While this

treatment measures the cost of

net assets acquired, it actually

results in capitalizing future

earnings before they have

accrued—theyhave not hap-

pened. Making the situation

even worse is that public com-

panies are permitted to keep

this “asset” on their balance

sheets unless circumstances

arise that require it to be writ-

ten down as being impaired

(FASB ASU 2011-8). While

most assets are either converted

into cash at some definite point

in time (e.g., receivables, inven-

tory, investments) or recog-

nized on the income statement

as they are used over time (e.g.,

depreciable operational assets),

goodwill can sit on a balance

sheet indefinitely, inflating both

total assets and net income.

The irony of current U.S. gen-

erally accepted accounting

principles (GAAP) is that one

of the “least realized assets of

all” winds up staying an asset

longer than most real assets

do; my most G-rated label for

thisirony is the “Goodwill

Problem.”

While many, including

myself, have called for the

acquirer to immediately rec-

ognize the overpayment for

a target as a loss, the FASB’s

most recent exposure draft

embraces the maintenance of

current accounting for goodwill

with a simplification of the

impairment test (FASB, 2016).

If the Exposure Draft (ED)

released on May 12, 2016, is

passed, the second step of the

impairment test requiring the

estimation of the implied fair

value of Goodwill will be elimi-

nated in favor of a one-step test

that simply requires the com-

parison of the carrying and fair

values of each business unit for

which the company recognizes

goodwill (FASB, 2016). While

it is impossible to anticipate if

this will mitigate or exacerbate

the Goodwill Problem, it is cer-

tain that goodwill will continue

to be a significant component

of most public companies’ bal-

ance sheets whether or not the

terms set forth in the May 12,

2016, ED become U.S. GAAP.

The arguments against

my position are that (a) good-

will represents the value that

the acquiring company will

eventually add now that it has

control of the target, and (b)

goodwill captures the value of

items (e.g., brand, reputation)

that current accounting rules

do not allow to be capitalized

(see Wen & Moehrle, 2016, for