Goodwill Amortization and the Usefulness of Earnings
30 Pages Posted: 14 Nov 2000
Date Written: August 2000
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: Suggested Citation