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Strategies & Market Trends : Graham and Doddsville -- Value Investing In The New Era
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To: porcupine --''''> who wrote (1542)4/14/1999 9:22:00 PM
From: Eggolas Moria   of 1722
 
Porc -

I've always had some problems with the accounting standards regarding Goodwill amortization. Why, for instance, is our method of enforcing economic reality truer than the accounting standards in another country that permit the goodwill to be written off the balance sheet without impacting the income statement?

Moreover, isn't it possible that the rules that were designed for a manufacturing economy may not hold true in the present economy where earnings are often substantially the result of not tangible assets, but intangible assets such as brands and patents?

For instance, assume that someone merges with Coke and secures the Coca-Cola brand in a purchase accounting manner. Does the company milk the brand, producing income and letting the brand value decline? Of course not. More likely, the company invests in broader distribution, growing the business and improving the long-term value of the brand and its ability to generate profits. Where is the economic reality in forcing the acquiring company to write off the goodwill that is, in effect, the value of the brand?

No system of accounting rules is perfect and I can think of other situations in which the rules would be appropriate, but that in itself says a great deal about how much importance one should attach to the standard, IMO. Case by case only.
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