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The Nature and Implications of Acquisition Goodwill

54 Pages Posted: 5 Apr 2011 Last revised: 15 Mar 2012

Thomas Z. Lys

Northwestern University - Kellogg School of Management

Linda Vincent

Northwestern University

Nir Yehuda

University of Texas at Dallas - Department of Accounting & Information Management

Date Written: March 12, 2012

Abstract

We investigate the conditions under which the accounting‐based acquisition goodwill disclosed by U.S. filers appropriately represents an asset to the firm — specifically, whether accounting - based acquisition goodwill is representationally faithful to the underlying economics of the transaction as required under the FASB’s conceptual framework. Analysis of financial statements for a sample of 2,123 merger transactions completed during 2002 — 2006 suggests that although 41% of these transactions have a negative net present value, the acquirer did not write‐off goodwill at the time of acquisition as required under U.S. GAAP. When we adjust the recorded goodwill to be consistent with SFAS #141, we find that it is a better predictor of future operating performance. As a thought experiment, we also adjust recognized goodwill for the other 59% of the sample with positive net present value acquisitions to reflect the estimated fair value of goodwill and similarly find that this goodwill construct is also a better predictor of future operating performance than recognized acquisition accounting goodwill.

Keywords: goodwill, acquistion

JEL Classification: M41, G14

Suggested Citation

Lys, Thomas Z. and Vincent, Linda and Yehuda, Nir, The Nature and Implications of Acquisition Goodwill (March 12, 2012). Available at SSRN: https://ssrn.com/abstract=1802612 or http://dx.doi.org/10.2139/ssrn.1802612

Thomas Z. Lys

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Department of Accounting & Information Systems
Evanston, IL 60208
United States
847-491-2673 (Phone)
847-467-1202 (Fax)

Linda Vincent

Northwestern University ( email )

2001 Sheridan Road
Accounting & Information Systems
Evanston, IL 60208
United States
847-491-2659 (Phone)

Nir Yehuda (Contact Author)

University of Texas at Dallas - Department of Accounting & Information Management ( email )

2601 North Floyd Road
Richardson, TX 75083-0688
United States

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