An investigation into the accounting treatment of goodwill in Ireland

Abstract

Accounting for goodwill has been a topic of debate for the last century due to the nature of goodwill and difficulties in valuing and presenting it into accounts. Its importance has increased in the last years due to the emergence of the knowledge- based economy and international reporting requirements for comparable, relevant and reliable financial information.

The purpose of this study is to understand, describe, and explain the accounting treatment of goodwill in Ireland since the 1970’s, following an interpretivist approach.

The opinions on and accounting treatments of this subject have differed and changed frequently. It was first deducted from the stockholders’ equity, and then capitalised without/or with amortisation, and finally capitalised and tested for impairment annually.

The literature review presents a comprehensive overview of the area of goodwill accounting, describing how the methods of accounting for it have changed over the years, identifying the strengths and weaknesses of the various approaches, and comparing the standards applied to the area.

The primary research was carried out through a questionnaire (for analysing the opinions of senior accountants of Irish listed companies on the international accounting standards on goodwill) and interviews with two experts in financial accounting.

Proponents of IFRS 3 claim that this standard provides investors with transparent and comparable information, while the critics argue that the impairment test is subjective, leaves room for earnings’ management and is not much more accurate than the amortisation method previously used.