Goodwill Amortization and the Usefulness of Earnings

30 Pages Posted: 14 Nov 2000

See all articles by Ross Jennings

Ross Jennings

University of Texas at Austin - Department of Accounting

Marc J. LeClere

Valparaiso University

Robert B. Thompson

American University

Multiple version iconThere are 2 versions of this paper

Date Written: August 2000

Abstract

In 1999, the Financial Accounting Standards Board proposed changes in the accounting for business combinations and intangibles that would significantly increase the level of goodwill amortization in corporate income statements. In an effort to make goodwill accounting more transparent, the proposal would also require firms to report goodwill amortization on the face of the income statement, preceded by a subtotal for "earnings before goodwill amortization." This study compares earnings before goodwill amortization and reported earnings (which includes goodwill amortization) as alternative summary indicators of share values for a large sample of publicly-traded firms over the period 1993-1998. We find that earnings before goodwill amortization explains significantly more of the observed distribution of share prices than earnings after goodwill amortization, and that when share valuations are based on earnings alone, goodwill amortization simply adds noise to the measure. These results suggest that making the earnings impact of goodwill accounting more transparent would benefit investors and analysts.

JEL Classification: M41, M44, G12

Suggested Citation

Jennings, Ross and LeClere, Marc J. and Thompson, Robert B., Goodwill Amortization and the Usefulness of Earnings (August 2000). Available at SSRN: https://ssrn.com/abstract=244053 or http://dx.doi.org/10.2139/ssrn.244053

Ross Jennings (Contact Author)

University of Texas at Austin - Department of Accounting ( email )

Austin, TX 78712
United States
512-471-5340 (Phone)
512-471-3904 (Fax)

Marc J. LeClere

Valparaiso University ( email )

Valparaiso, IN 46383
United States
219-464-4158 (Phone)

Robert B. Thompson

American University ( email )

4400 Massachusetts Avenue NW
Washington, DC 20816-8044
United States

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