ABACUS, Vol. 29, No.

1, 1993

GRAEME WINES AND COLIN FERGUSON

An Empirical Investigation of Accounting

Methods for Goodwill and Identifiable
Intangible Assets: 1985 to 1989
Accounting for intangible assets represents one of the more controversial
accounting standards issues. This study examines the accounting policies
adopted for goodwill and for identifiable intangible assets by a sample
of 150 Australian Stock Exchange listed companies over the five-year period
1985 to 1989 inclusive. Findings reveal a general decrease in the diversity
of goodwill accounting policies over the study period but the converse
for identifiable intangible policies. In particular, an increase in the
percentage of companies electing not to amortize identifiable intangibles
was found. The study provides evidence to support claims that companies
have been recognizing identifiable intangibles to reduce the impact on
reported operating profits of the requirement of accounting standards for
the amortization of goodwill.
Key words: Accounting Policies; Goodwill; Identifiable Intangible Assets,

Accounting for intangible assets is one of the more controversial issues to be addressed
in accounting standards. For example, Miller and Carnegie (1990, p. 48) believe
that achieving a consensus on a set of accounting standards for intangible assets
appears to be virtually impossible.
The Australian Accounting Research Foundation (AARF; 1989, p. 5) defines
intangible assets as non-monetary assets without physical substance and identz3able
intangibles as those which are capable of being both individually identified and
specifically brought to account. Examples of identifiable intangible assets include
brand names, copyrights, franchises, intellectual property, licences, mastheads,
patents and trademarks.
The term goodwill is generally used as a collective description of unidentified
intangible assets (Henderson and Peirson, 1984, p. 302). In practice, goodwill is
typically recognized as the difference between the price paid for a business and
the sum of the valuations of its identifiable assets less the sum of its liabilities.
Accounting for goodwill and for identifiable intangible assets are interrelated,
and this study examines both issues in parallel. The objective of the study is to
examine the financial statements of a sample of 150 Australian Stock Exchange
GRAEME
WINESis a Lecturer and COLINFERGUSON
is a Senior Lecturer in Accounting, Deakin University,
Victoria.
The authors wish to thank Garry Carnegie, Ian Zimmel and two anonymous reviewers for their
comments on earlier drafts of this paper.

90

GOOD WILL

A N D

IDENTIFIABLE

INTANGIBLE

ASSETS

listed companies over the period 1985 to 1989 to ascertain any trends in accounting
policies adopted for goodwill and identifiable intangibles. This enables the
interrelationship between these accounting policies to be investigated.
BACKGROUND
The first Australian accounting standard issued relating specifically to intangible
assets (albeit only to goodwill) was Statement of Accounting Standards AAS 18,
Accounting for Goodwill (ASA & ICAA, 1984) which was issued in March 1984
to operate for accounting periods ending on or after 31 March 1985. Australian
companies had previously adopted a wide variety of accounting treatments for
goodwill (see, for example Standish, 1972; Miller, 1973; Gibson and Francis, 1975;
Goodwin, 1986b; Kirkness, 1987). Gibson and Francis concluded that this complete
permissiveness or flexibility is seen to result in chaos (1975, p. 171).
Perhaps the most controversial provision of AAS 18 is the requirement for the
systematic amortization of goodwill over the time during which the benefits are
expected to arise. This period should not exceed twenty years (para. 40). To minimize
the impact of this requirement on reported operating profits, many companies
eliminated or reduced their goodwill balances in the period before the standard
became operative (Kirkness, 1987, p. 51). This was achieved by various methods,
including direct write-offs or by reallocations to, and revaluations of, other assets.
AAS 18 has also been attacked on the grounds of its subjectivity. For example,
Henry Bosch, then chairman of the National Companies and Securities Commission
(NCSC), argued that accounting diversity remained and that, as a result, there
was scope for creative accounting and deliberate manipulation of figures (cited
in Kirkness, 1987, p. 49). Goodwin (1986a, p. 41) argued that In view of the subjectivity involved, management effectively is permitted to write off goodwill whenever
it desires. Although the introduction of the goodwill standard increased the number
of Australian companies systematically amortizing goodwill, there was still a significant degree of non-compliance (see, for example, Carnegie and Gibson, 1987;
Kirkness, 1987; Williams and Carnegie, 1989). It required the introduction of ASRB
1013 for compliance to be more effectively enforced. This approved accounting
standard has statutory backing and applies to companies reporting in financial
periods ending after 18 June 1988.
With the advent of the ASRB goodwill standard it again became obvious that
many companies sought to minimize the impact of the requirement for the
amortization of goodwill. Primarily, this was achieved by recognizing identifiable
intangible assets, thereby reducing the amount that would otherwise have been
recorded as goodwill. For example, Walker (1989, p. 10) refers to companies that
have written up identifiable intangibles ostensibly to tell the truth about the existence
I

See, for example, Goodwin and Harris (1991). Also, as an indication of increased compliance, Carnegie
and Gibson (June 1992) using a mail survey approach found that a greater percentage of company
respondents indicated the adoption of policies more consistent with the requirements of AAS 18
and ASRB 1013 than was the case with an earlier survey when only AAS 18 was applicable.

91

ABACUS

of valuable assets, but notes that Privately, many practitioners concede that the
main motive was often to avoid the approved standard ASRB 1013. Woolf (1989,
p. 32) observed similar practices in the United Kingdom.
One of the slickest solutions.. .has been to take legitimate advantage of the standards
criterion for distinguishing goodwill from other intangibles. . .The trick, therefore, is to
allocate as much as possible of the difference between the price paid for an acquisition
and the separable net assets acquired (i.e., goodwill) t o . . .bespoke intangibles.

In response to this practice, the AARF issued Accounting Guidance Release No. 5
(AGR 5; 1985), which draws attention to the fact that these intangibles, in accordance
with AAS 4, Depreciation of Non-Current Assets, are required to be written off
by systematic charges to the profit and loss account over the period of time during
which benefits are expected to arise (AGR 5, para 3). Nevertheless, widespread
non-compliance continued (see Carnegie and Kallio, 1988; Goodwin and Harris,
1991). Also, in what has been referred to as the intangible mirage, some companies
have written off identifiable intangibles as extraordinary items after having received
third-party valuations (Carnegie and Gibson, 1989), a practice seemingly aimed
at reducing or eliminating any necessity for current and future amortization charges
against operating profit.
In an attempt to develop an accounting standard on identifiable intangibles, the
AARF issued an exposure draft in August 1989 (ED 49; 1989). This draft advocated
that recorded identifiable intangibles be amortized to the profit and loss account
over a finite period (para. 40).The commentary stated that when making assessment
in prospect few assets could be expected to provide benefits over a period in excess
of twenty years (para. xi). However, reflecting the controversial nature of the drafts
contents, the AARF has announced that ED 49 has been withdrawn in view of
the lack of consensus on the subject at national and international level (1992, p. 1).
The Chairman of the Business Council of Australias Accounting Standards
Working Group reflected the business communitys concern when he stated that
It is apparent that the inter-related issues of goodwill and intangibles need to be
given much more attention and that accounting bodies should not ignore the concern
that exists in the business community in this regard (Brass, 1989, p. 66).
THE STUDY
While the issues of accounting for goodwill and for identifiable intangible assets
are inter-related, most of the studies investigating the accounting procedures adopted
by Australian companies for goodwill and identifiable intangibles,,have focused
on only one or other of these issues. This study examines both issues in parallel.
The financial statements of a sample of Australian Stock Exchange listed
companies are examined to investigate the inter-relationship between the accounting
policies adopted for goodwill and for identifiable intangibles. These policies are
reviewed for the five-year period 1985 to 1989 inclusive. This enables a longitudinal
approach over the period in which AAS 18, AGR 5 and ASRB 1013 have been
92

GOOD WILL

A N D

IDENTIFIABLE

INTANGIBLE

ASSETS

operative. The final year (1989) was chosen to eliminate any possible effects of
ED 49.
A sample of 150 companies listed on the Australian Stock Exchange during the
period 1985 to 1989 inclusive (by reference to their financial-statement balance dates)
was randomly selected and their financial statements for each of those years were
used as the basis for the study.
The general research objective was to examine the financial statements of a sample
of companies over a five-year period to ascertain any trends in accounting policies
adopted for goodwill and identifiable intangible assets. In particular, for the period
1985-1989 the following questions were addressed:
What has been the trend in the incidence with which companies have been reporting
goodwill and identifiable intangible assets?
Has there been a change in the accounting policies adopted for goodwill over
the research period? It would be expected that, with the introduction of AAS 18
and ASRB 1013, there would have been an increased adoption of policies consistent
with those standards. Thus:
H1: Over the period 1985 to 1989, an increasing percentage of companies reporting
goodwill adopted, for that goodwill, the accounting policy of capitalization and
systematic amortization.
Has there been a change in the accounting policies adopted for identifiable
intangible assets? Conditional on companies recognizing identifiable intangibles in
an effort to reduce the impact on reported operating profits of the requirements
of AAS 18 and ASRB 1013 for the amortization of goodwill, it would be expected
that a decreasing percentage of companies reporting identifiable intangibles would
have adopted the accounting policy of capitalization and systematic amortization.
Thus:

H2: Over the period 1985 to 1989, a decreasing percentage of companies reporting
identifiable intangible assets adopted, for those intangibles, the accounting policy
of capitalization and systematic amortization.
As a joint test regarding goodwill and identifiable intangible accounting policies,
it would be expected that there would be a decrease in the incidence of companies
not amortizing or writing-off goodwill as operating expenses while there would
be an increase in the incidence of companies not amortizing or writing-off identifiable
intangibles as operating expenses. Thus:
H3: Over the period 1985 to 1989, the number of companies not amortizing/ writingoff goodwill as operating expenses is inversely related to the number of companies
not amortizing/ writing-off identifiable intangible assets as operating expenses.
STUDY FINDINGS
Incidence of Companies Reporting Goodwill and Identifiable Intangibles
Table 1 presents summary statistics showing the number of sample companies which
recognized goodwill and/ or identifiable intangibles in their financial statements for
93

ABACUS

TABLE
1
RECOGNITION OF GOODWILL AND IDENTIFIABLE
INTANGIBLE ASSETS IN FINANCIAL STATEMENTS
~

Year

Goodwill
(n = 150)

Identifiable
intangibles
(n = 150)

1985
1986
1987
1988
1989

71
69
80
84
83

21
26
38
46
44

each year. For the purpose of this study, companies are considered to have recognized
goodwill and/ or identifiable intangibles if these assets had been accounted for in
any way. This definition includes any immediate write-off of goodwill/ identifiable
intangibles as well as any capitalization of such assets.
The figures in Table 1 revealed that more companies recognized goodwill than
recognized identifiable intangibles. Also, the number of companies recognizing
identifiable intangibles exhibits a general upward trend over the study period. Only
21 companies accounted for identifiable intangible assets in their financial statements
in 1985. This increased to 46 companies in 1988, but dropped back to 44 in 1989.
Hence, more than twice the number of companies were accounting for identifiable
intangible assets in 1989 (29.3 per cent of the total) compared to the number in
1985 (14.0 per cent of the total). The average annual increase in the number of
companies recording identifiable intangibles (21.7 per cent per annum) exceeded
the average growth rate in the number of companies reporting goodwill (4.3 per
cent per annum).2
Goodwill Accounting Policies, I985 to 1989
The study findings indicate that a variety of accounting policies had been adopted
for goodwill over the study period. The following categories can be used to summarize
the accounting policies adopted by sample companies:
1. Goodwill capitalized and amortized systematically (systematic amortization).
2. Goodwill capitalized and amortized non-systematically (non-systematic
amortization).
3. Goodwill capitalized with amortization treated as an extraordinary item
(extraordinary amortization).
4. Goodwill capitalized as an asset and not amortized (no amortization).
2

This finding is contrary to Goodwin and Harris (1991), who examined the period 1987 to 1989 and
found a greater growth rate for the reporting of goodwill than for the reporting of identifiable intangibles.
This is possibly due to Goodwin and Hamss research sample, which was drawn from only industrial
companies in the Top 150 of listed Australian companies (in comparison to our sample, drawn from
all Australian listed companies).

94

GOOD WILL A N D

IDENTIFIABLE

INTANGIBLE

ASSETS

5. Goodwill treated as a cumulative deduction from shareholders equity and not

amortized (dangling debit).
6 . Goodwill written off in a lump sum as an extraordinary item (written-off
extraordinary).
7. Goodwill written off as a lump sum against retained earnings and reserves
(written-off reserves).
8. Goodwill written off as a lump sum (abnormal item above the line) in the
profit and loss account (written-off abnormal).
9. Both 1 and 6. That is, while systematically amortizing goodwill, a lump-sum
extraordinary write-off is also made.
10. Both 1 and 8. That is, while sytematically amortizing goodwill, a lump-sum
abnormal write-off above the line is also made.
Category 1 (capitalization with systematic amortization) is the general method
recommended by AAS 18 (para. 40) and ASRB 1013 (para. 35). However, both
standards allow for lump-sum write-offs of goodwill in certain circumstances. To
the extent that the cost of any acquisition exceeds the fair value of the identifiable
net assets acquired but does not constitute goodwill, that amount should be charged
to the profit and loss account immediately (AAS 18, para. 41; ASRB 1013, para.
33). Similarly, the unamortized balance of goodwill should be reviewed at balance
date and, to the extent that future benefits are no longer probable, should be written
off to profit and loss (AAS 18, para. 41; ASRB 1013, para. 36). The goodwill
standards are silent on the exact treatment of these lump-sum write-offs. No guidance
is provided as to whether such write-offs should be treated as operating, abnormal
or extraordinary items. Accordingly, the provisions of AAS 1 (ASA & ICAA, 1973),
the general profit and loss standard operative at the time, would become applicable.
Nevertheless, it seems that, from the above categories of goodwill, categories
6 , 8, 9 and 10 would probably meet the standards requirements in appropriate
circumstances, although those treatments may give scope for companies to engage
in misleading or creative or manipulative accounting. In relation to extraordinary
write-offs, the applicable version of AAS 1 actually listed the write-off of goodwill,
other than in accordance with a regular policy of amortization, as a specific example
of an item which, in particular circumstances, may fall within the extraordinary
items definition (ASA & ICAA, 1973, para. 10).
The figures in Table 2 summarize the frequency of adoption of each of the ten
categories of policies in each of the years 1985 to 1989, revealing that the number
of companies adopting the policy of the systematic amortization of goodwill
increased. In 1985, 43.7 per cent of companies accounting for goodwill adopted
this policy, increasing steadily to an 86.8 per cent compliance rate in 1989. This
trend is in the direction suggested by HI.
To test H1 (whether this increasing percentage is significant), the chi-square test
was used to determine whether an association exists between goodwill accounting
policies and the year of the study period.3 Results of testing confirmed the significance
3

In performing this procedure, all accounting policy categories other than systematic amortization
were collapsed into a single group.

95

Systematic amortization
Non-systematic amortization
Extraordinary amortization
No amortization
Dangling debit
Written-off extraordinary
Written-off reserves
Written-off abnormal
Both I and 6
Both 1 and 8

Totals

6.
7.
8.
9.
10.

5.

1.
2.
3.
4.

Accounting
policy

71

31
0
3
3
3
19
7
0
5
0

1985
Frequency
36
0
3
2
3
18
3
0
4
0
69

100.0

1986
Frequency

43.7
0.0
4.2
4.2
4.2
26.8
9.9
0.0
7.0
0.0

100.0

52.2
0.0
4.3
2.9
4.3
26.1
4.4
0.0
5.8
0.0

100.0

80

1
1
1
I
22
2
1
7
0

55.0
1.3
1.3
1.3
1.3
27.5
2.4
I .2
8.7
0.0

44

1987
Frequency

SUMMARY O F GOODWILL ACCOUNTING POLICIES

TABLE
2

84

16
0
2
9
1

53
1

1988
Frequency

100.0

63.1
1.2
1.2
1.2
0.0
19.0
0.0
2.4
10.7
1.2

83

72
0
0
0
0
2
0
0
9
0

1989
Frequency

100.0

86.8
0.0
0.0
0.0
0.0
2.4
0.0
0.0
10.8
0.0

0,

ci

b
ta
b

G O O D WILL

A N D

IDENTIFIABLE

INTANGIBLE

A S S E T S

of the association (X2 = 35.72, df = 4, p < 0.01) leading to the conclusion that,
over the period 1985 to 1989, companies have increasingly adopted the capitalization
and amortization policy advocated by AAS 18 and ASRB 1013.
The results in Table 2 confirm that there has been a reduction in the diversity
of accounting policies over the study period. Of the ten different accounting policies
adopted by sample companies over the period, seven were used in each of the
1985 and 1986 years, nine in 1987, eight in 1988 and by 1989 the number of accounting
policies had fallen to three. Further, the policies adopted in 1989 (systematic
amortization, written-off extraordinary and a combination of the two) were identified
earlier as complying (at least technically, in the case of the latter two) with the
provisions of the relevant goodwill standards.
Our results confirm earlier research documenting a degree of non-compliance
with AAS 18. In 1985, sixteen companies (or 22.5 per cent of companies accounting
for goodwill) adopted accounting policies in conflict with the standards provisions
(none had a balance date earlier than 31 March, the date on which AAS 18 became
operative). In 1986 and 1987, eleven companies (15.9 per cent) and six companies
(7.5 per cent) respectively adopted policies clearly in conflict with AAS 18.
Of the eighty-four companies recognizing goodwill in 1988, three (or 3.6 per
cent) adopted the policies of capitalization with non-systematic, extraordinary or
no amortization, in clear breach of the ASRB standards provisions. These companies
did not have balance dates prior to 19 June (the date on which ASRB 1013 became
operable), nor were they subject to any NCSC exemption.
In 1989, all sample companies adopted an accounting policy for goodwill consistent
with the ASRB standards provisions. Hence, in association with the observations
above, it is reasonable to conclude that ASRB 1013 has increased compliance levels
in the goodwill accounting area.
In 1988, four companies disclosed that they were subject to NCSC orders granting
transitional exemption from the provisions of ASRB 1013. In this transitional year,
these four companies adopted the lump-sum extraordinary write-off policy. By
disclosing that they were taking advantage of an NCSC order, each of these companies
was, in effect, conceding that such lump sum write-offs were not in accordance
with the provisions of the relevant goodwill standards4

Accounting Policies Adopted f o r Identifiable Intangible Assets, 1985 to 1989

Table 1 reveals that the recognition of identifiable intangibles increased over the
period 1985 to 1989. Table 3 summarizes the various classes of identifiable intangibles
that had been accounted for by companies each year. It shows that while trademarks
and tradenames are the class of identifiable intangibles that have had the greatest

In addition to the above four companies that took advantage of the NCSC order, a further twelve
companies (14.3 per cent of companies accounting for goodwill) in 1988 and two companies (2.4
per cent) in 1989 adopted the extraordinary write-off policy. Also, nine companies in each of 1988
and 1989 adopted policies of amortization together with an extraordinary write-off. For these latter
companies, the extraordinary write-offs were, on average, thirty times larger than the systematic
amortization charges.

97

ABACUS
TABLE
3
CATEGORIES O F IDENTIFIABLE INTANGIBLE ASSETS RECOGNIZED
Identifiable
intangibles
Trademarks/ names
Patents
Licences
Rights (of any type)
Brand/ business names
Other (as a category)
Mastheads
Titles
Intellectual property
Technological assets
Franchises
Television licences
Totals a

1985

1986

1987

1988

1989

Total

9
11
8
8

18
16

24
21
13
13
10
2
1
1

24
16
14

80
72
52
52
29
6
5
5
3

8
7
8
1

3
I

10
12
6

I1
9
1

I
1
1
0

1
0

I
0
0
0
0

2
1

32

42

68

88

80

310

1
1
0

0
0

1
I

1
1

aThe totals in this table differ from the totals in Table I as various companies had recognized more
than one class of intangible asset.

numerical increase in recognition between 1985 and 1989, patents, licences, and
brand and business names also exhibit marked increases.5
The study findings indicate that a variety of accounting policies were adopted
for identifiable intangible assets over the study period. The following categories
can be used to summarize the accounting policies adopted by sample companies:

1. Identifiable intangibles capitalized and amortized systematically (systematic

amortization).
2. Identifiable intangibles capitalized and amortized non-systematically (nonsystematic amortization).
3. Identifiable intangibles capitalized and not amortized (no amortization).
4. Identifiable intangibles capitalized with a mixture of amortization and nonamortization for different classes of intangibles (mixed).
5. Identifiable intangibles written off in alump sum as an extraordinary item (writtenoff extraordinary).
6. Identifiable intangibles written off as a lump sum against retained earnings or
reserves (written-off reserves).
7. Both 1 and 5. That is, while systematically amortizing identifiable intangibles,
a lump-sum extraordinary write-off is also made.
5

Chi-square testing, where categories other than the first four (trademark names, patents, licences
and rights) were collapsed into a single group for testing purposes, did not support any significant
association between category of identifiable intangible and year ( x 2 = 6.89, df = 16, p > 0.05).
However, the general finding is consistent with Goodwin and Harris (1991), where three classes of
intangibles (brand and trade names, patents, and licences) showed notable increases in incidence of
recognition.

98

GOOD WILL

A N D

IDENTIFIABLE

INTANGIBLE

ASSETS

Table 4 summarizes the frequency with which each of the seven categories of
policies were adopted by companies in each of the years 1985 to 1989, revealing
a general increase in the diversity of accounting policies used by the sample companies
for identifiable intangible assets over the study period. Of the seven different policies,
three were first used in 1985. In 1986, four different policies were used by sample
companies, with this increasing to five and six different policies, respectively, in
1987 and 1988. The number of different policies used reduced to four in 1989,
but only one of these represented a comprehensive amortization policy.
Consistent with the trend suggested by H2, a decreasing percentage of companies
adopted the accounting policy of the systematic amortization of identifiable
intangible assets. While 61.9 per cent of companies recognizing identifiable intangibles
adopted the systematic amortization policy in 1985, this had reduced to 45.4 per
cent in 1989.6
To test Hypothesis 2, the chi-square test was used.7 Despite the actual decrease
in the percentage of companies systematically amortizing identifiable intangibles,
this testing could not reject the null hypothesis of no association ( X 2 = 1.70, df = 4,
p > 0.05).
Nevertheless, in addition to the increase in the percentage of companies adopting
the policy of capitalization without any amortization, there has been an increase
in the number of companies adopting the lump-sum extraordinary write-off policy
over the study period. While no company had adopted this policy in 1985, three
(or 6.8 per cent of companies recognizing identifiable intangibles) had made
extraordinary write-offs in 1989. A further 6.8 per cent of companies recognizing
identifiable intangibles had adopted a mixed policy in which at least one class
of capitalized identifiable intangibles was not amortized. This policy was not adopted
by any company in 1985.
From the above discussion, it can be concluded that AGR 5, published in December
1985 and recommending the systematic amortization of intangibles, has been ignored
by a significant percentage of sample companies over the period studied. In fact,
54.5 per cent of companies recognizing identifiable intangibles failed to follow its
guidance in 1989.
Joint Testing of Incidence of Companies Adopting Policies of Non-Amortization
To highlight the trend toward the non-amortization of identifiable intangibles over
the study period, Figure 1 graphs the number of companies in each of the years
1985 to 1989 electing not to amortize capitalized goodwill and identifiable intangible
asset balances as operating expenses. While the graph highlights the sharp reduction
in the number of companies electing not to amortize goodwill balances, it also

This finding is in contrast to Goodwin and Hams (1991), where an increasing percentage of companies
adopted the systematic amortization policy over the period 1987 to 1989. As with the contrary finding
noted in footnote 1, a possible explanation stems from the different sample definitions.
As with the testing of H1, all accounting policy categories other than systematic amortization were
collapsed into a single group.

99

Systematic amortization
Non-systematic amortization
No amortization
Mixed
Written-off extraordinary
Written-off reserves
Both 1 and 5
21

13
0
7
0
0
I
0

1985
Frequency

100.0

61.9
0.0
33.3
0.0
0.0
4.8
0.0

26

0
0

1
1

12
0
12

1986
Frequency

TABLE5

100.0

46. I
0.0
46.1
3.9
3.9
0.0
0.0

38

19
I
16
1
0
0
1

1987
Frequency

100.0

50.0
2.6
42.2
2.6
0.0
0.0
2.6

46

16
2
3

23

1988
Frequency

100.0

50.0
2.2
34.8
4.3
6.5
2.2
0.0

44

20
0
18
3
3
0
0

1989
Frequency

100.0

45.5
0.0
40.9
6.8
6.8
0.0
0.0

44
21
44
21

Percentage of total assets

Goodwill
Identlfiable intangibles

Percentage of shareholders equity

Goodwill
Identifiable intangibles

_____~

1985

6.2
19.9

2.7
12.3

48
26

48
26

1986

5.9
17.2

2.7
9.1

55
38

55
38

1987

4.9
16.3

3.4
11.8

68
44

68
44

1988

5.1
19.5

2.2
8.4

82
41

82
41

1989

9.9
23.3

3.1
7.5

SUMMARY OF RELATIVE AVERAGE SIZE OF CAPITALIZED GOODWILL AND IDENTIFIABLE INTANGIBLE ASSET BALANCES

Totals

I.
2.
3.
4.
5.
6.
7.

--

Accounting
policy

TABLE4

SUMMARY O F IDENTIFIABLE INTANGIBLE ASSETS ACCOUNTING POLICIES

GOOD WILL

A N D

IDENTIFIABLE

INTANGIBLE

A S S E T S

FIGURE
1
INCIDENCE OF COMPANIES NOT AMORTIZING GOODWILL/ IDENTIFIABLE
INTANGIBLE ASSET BALANCES AS OPERATING EXPENSES
35

30

25

Goodwill
0

1985

1986

1987

1988

Year

highlights the converse in relation to identifiable intangible asset balances. This

is consistent with the relationship suggested by H3.
The chi-square test was used to determine whether an association exists between
non-amortization and the year of the study period,8 resulting in confirmation of
the significance of the association posited in H3 (X2 = 36.55, df = 4, p < 0.01).
Thus, over the period 1985 to 1989, a diminishing number of companies recognizing
goodwill have chosen not to make any charges against operating profit for the
amortization or write-off of goodwill. However, at the same time, an increasing
number of companies recognizing identifiable intangible assets have chosen not
to make any charges against operating profit for the amortization or write-off of
those intangible balances. As a joint test of non-amortization, this supports the

The comparison was made between companies not amortizing goodwill as operating expenses and
those not amortizing identifiable intangibles as operating expenses, the analysis being over the period
1985 to 1989.

10I

1989

ABACUS

general proposition that companies have been increasingly recognizing identifiable

intangible assets in an effort to reduce the impact on reported operating profits
of the requirement for the amortization of goodwill.

The Relative Size of Capitalized Goodwill and Identfiable Intangible Asset Balances
It was noted above that, associated with the increase in the number of companies
recognizing identifiable intangibles over the study period, there was an increase
in the percentage of companies electing not to amortize capitalized identifiable
intangible asset balances. Putting this obsevation into perspective, it is appropriate
to examine the relative size of capitalized goodwill and identifiable intangible asset
balances. If such balances were not material then these observations would be trivial
and would not warrant any degree of concern.
Table 5 presents a comparison of the average size of goodwill and identifiable
intangible balances, as a percentage of both total assets and shareholders equity,
for those companies which have capitalized such assets within the balance sheet
(whether or not such balances are subject to amortization charges). On average,
the capitalized identifiable intangible asset balances have been approximately three
times the size of the capitalized goodwill balances. Further, in terms of the materiality
guidelines laid down in AAS 5 Materiality in Financial Statements (ASA 8i ICAA,
1974), the identifiable intangibles balances would be considered material, being
greater than 10 per cent of equity in all years (AAS 5 , paras 11, 12).
Companies Capitalizing Both Goodwill and Identfiable Intangible Assets
The subset of results in Table 5 are not directly comparable as they are a comparison
of different subsets of companies. To overcome this potential difficulty, Table 6
compares the relative average size of capitalized goodwill and identifiable intangible
asset balances for only those companies recognizing both classes of asset in each

TABLE
6
SUMMARY OF RELATIVE AVERAGE SIZE OF CAPITALIZED GOODWILL AND
IDENTIFIABLE INTANGIBLE ASSET BALANCES:
COMPANIES CAPITALIZING BOTH CLASS OF ASSET

Percentage of total assets

Goodwill
Identifiable intangibles
Percentage of shareholders
equity
Goodwill
Identifiable intangibles

1985

1986

1987

1988

1989

1.6

2.9

9.2

6.5

2.9
4.1

2.0
4.8

3.7
6.1

3.2
14.6

7. I
14.7

5.5
9.0

4.3
13.3

13.1
17.3

(n = 11)

(n = 17)

(n = 22)

(n = 30)

(n = 33)

102

TABLE7

Goodwill
Identifiable intangibles

8
6

(n = 11)

1985

72.7
54.5

%
11
7

(n

%
64.7
41.2
17)

1986

21
14

%
95.5
63.6

(n = 22)

1987

17

27

%
90.0
56.7
(n = 30)

1988

33
18

(n

%
100.0
54.5

33)

1989

SUMMARY OF NUMBER OF COMPANIES AMORTIZING CAPITALIZED GOODWILL AND IDENTIFIABLE INTANGIBLE ASSET BALANCES:
COMPANIES CAPITALIZING BOTH CLASS O F ASSET

t,

h
Y

t,
t,

th

k
2

b
h

ABACUS

year. The general conclusion, though, is the same as that drawn above; that is,
that identifiable intangible assets balances are a material item in the balance sheets
of those companies which have capitalized such assets.
Facilitating further comparison of companies capitalizing both goodwill and
identifiable intangible assets, Table 7 shows the accounting policies used to amortize
the capitalized balances of those companies. It reveals the number of companies
in each year amortizing goodwill compared with the number amortizing identifiable
intangibles.
Comparing the results in Tables 6 and 7, for companies capitalizing both goodwill
and identifiable intangible assets, identifiable intangible balances are found to be
of greater magnitude than the goodwill balances. Further, for these companies there
is a lesser propensity to amortize those larger identifiable intangible balances.
Consistent with observations made previously, this propensity not to amortize has
increased over the research period.
SUMMARY AND CONCLUSIONS
The findings of this study suggest that the goodwill accounting policies adopted
by companies over the period 1985 to 1989 have increasingly complied with the
relevant goodwill accounting standards. In particular, this increased compliance
can be attributed to the introduction of ASRB 1013. The study found a reduction
in the diversity of accounting policies adopted for goodwill over the study period
and an increase in the number of companies electing to amortize goodwill balances
systematically.
There was an observed increase in the number of companies recognizing identifiable
intangible assets over the period 1985 to 1989, and an increase in the diversity of
accounting policies adopted for those identifiable intangibles. In particular, there has
been a decrease in the percentage of companies adopting the systematic amortization
policy and a corresponding increase in the percentage electing not to amortize
identifiable intangibles. T h is despite the guidance contained in AGR 5.
While further research would be required to determine conclusively the exact
reasons for the increase in the recognition of identifiable intangible assets over
the study period, it seems appropriate to conclude from the above that the studys
data supports anecdotal inferences and assertions claiming that companies have
been recognizing identifiable intangibles in an effort to reduce the impact on reported
operating profits of the requirement for the amortization of goodwill balances.
A final comment can be made regarding the general business communitys respect
for the professions standards and guidelines. As noted above, the results from
the study confirm prior research findings documenting widespread non-compliance
with the professions guidance contained in AGR 5. Also, the results suggest that
it required the introduction of ASRB 1013 with legislative backing to enforce
compliance with the goodwill standard. Taken together, these observations are a
sad reflection on the ability of the professional accounting bodies to enforce their
own standards and guidelines in circumstances where these are controversial to
the business community.
104

GOOD WILL

A N D

IDENTIFIABLE

INTANGIBLE

ASSETS

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105