Goodwill Accounting 
A comparison between IAS, GAAP and German rules

A paper by: 

Roland Mózes
Gero Hübenthal
Pavel Tetyakov
Maarten Kockelkoren

Table of Contents

Chapter 1. Introduction 4

Chapter 2. About goodwill 4

2.1 Introduction 4
2.2 Definition and Nature of Goodwill 4
2.3 Accounting for business combinations 5
2.4 Accounting for goodwill 5

Chapter 3. Goodwill accounting - US GAAP 6

3.1 Introduction 6
3.2 The current FASB approach 7
3.3 New approach - Impairment only 7

Chapter 4. Goodwill accounting - IAS 9

4.1 Introduction 9
4.2 The IASB approach 9

Chapter 5. German rules in goodwill accounting 11

5.1 Basic information for the German accounting legislation 11
5.2 Goodwill accounting according to HGB 12
5.3 Goodwill accounting according to GAS 13

Chapter 6. Example 13

Chapter 7 Conclusion 15

Literature 17

Chapter 1. Introduction

Over the last few years a lot of acquisitions and mergers have taken place. In many cases goodwill is an important matter in acquisitions constituting a large part of the takeover price. Therefore the valuation method applied is crucial while there are still discussions about how it should be accounted for.

Especially in the ′new economy′ goodwill is an important issue. For instance, at the end of July 2000 Deutsche Telekom AG announced the acquisition of the US cell phone corporation Voicestream Wireless. The price was 50.3 billion USD. With a balance sheet equity value of approximately 8 billion USD according to US-GAAP a goodwill of 44.2 billion euros would have been the result. This goodwill had to be successfully written off over 15 years according to Deutsche Telekom. The resulting burden on the earnings of 3 billion euros plus the additional writing off of the UMTS licenses would bring the firms financial results in a problematic situation. This is only one of many examples, that shows the dramatic situation of the usage of goodwill in the consolidated financial statements.

In this paper we will first discuss goodwill in general. The way it occurs and the theoretical background. Then we discuss the specific approaches the FASB, IASB and German institutions have concerning goodwill.

Chapter 2. About goodwill

2.1 Introduction

Goodwill is an intangible asset, probably the most intangible of all intangible assets, hard to measure and even more difficult to account for. Some of the intangibles are identifiable, like patents and copyrights. On the other hand, intangibles such as favorable government regulations, outstanding credit ratings, superior management and good labor relations are examples of unidentifiable intangible assets. Goodwill comprises the complete set of unidentifiable intangible assets held by the reporting entity.

2.2 Definition and Nature of Goodwill

Goodwill can arise in two different ways:
1) It can be internally generated or;
2) it can be acquired as part of the acquisition of another company (business combination).

Because only acquired goodwill can be accounted for, this paper excludes internally generated goodwill. The definition of goodwill may then be defined in two different manners:

1. The residuum approach

In the residuum approach, goodwill is defined as the difference between the purchase price and the current or fair market value of an acquired company′s assets.

2. The excess profits approach

In the excess profits approach, goodwill is the difference between the combined company′s profits over normal earnings for a similar business. Under this definition, the present value of the projected future excess earnings is determined and recorded as goodwill. This concept is very difficult to measure since future earnings have no certainty.

Because only the residuum approach is allowed the excess profits approach will not be discussed any further in this paper.

2.3 Accounting for business combinations

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