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Accounting for Goodwill: An Examination of Factors Influencing Management Preferences

Research output: Contribution to Journal/MagazineJournal articlepeer-review

<mark>Journal publication date</mark>2000
<mark>Journal</mark>Accounting and Business Research
Issue number3
Number of pages14
Pages (from-to)213-226
Publication StatusPublished
<mark>Original language</mark>English


Abstract—This paper investigates factors that influenced the position of managements of UK-listed companies in the heated debate that surrrounded proposals for a new standard on goodwill accounting, i.e. the factors influencing whether managements preferred immediate write-off or capitalisation-based approaches. The factors investigated are derived from contracting cost theory, and include those associated with debt covenant restrictions and profitbased management schemes. They also include non-agency contracting costs. A key feature of the design is that, compared to prior research, we specify more rigorously circumstances where such contracting cost effects are, or are not, likely to be binding. In addition, the paper investigates the effects on management preferences of their beliefs about revisions in market perceptions of their companies resulting from changes in goodwill accounting. Our results support certain contracting cost-based hypotheses, but they also indicate that management beliefs about changes in market perceptions of their companies constitute a strong influence on their preferences.