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Abstract:
In this article we discuss the concepts of purchased and internally generated goodwill and propose a new classification, which is designed to consider smaller companies' specifications. We first analyze both the approaches in the literature and in the international accounting standards, in particular, IFRS 3 "Business Combinations", as to how purchased goodwill is classified. Second, we review the literature and the IFRS 3 "Business Combinations" about internally generated goodwill. We determine the meaning of internally generated goodwill and discuss the main arguments in the debate on for and against its recognition in the accounting reports. Our study manages to summarize all the types of goodwill used in the field of accounting, by thoroughly covering the related literature and international accounting standards. More importantly, our study offers a personal perspective of goodwill classification and its impact on a business. In this article we manage to clearly differentiate between all types of goodwill and discuss both purchased and internally generated goodwill. The conclusion we reach following our study is that a right classification of goodwill is essential to the management of a business.
Key words: goodwill, classification, purchased goodwill, negative goodwill, internally generated goodwill
JEL Classification: M41
1. Introduction
Goodwill has probably been the most controversial intangible asset in the last decade. The debate around goodwill begins from its definition and typology, to recognition in the financial statements and the choice between amortization and impairment for the accounting treatment. The reason why goodwill has increasingly gained popularity can be explained by the fact that it has become a growing component of the market capitalization figure. A co-authored study by Feng Gu and Lev (2000) establish that, at that time, goodwill made up, on average, for more than 70% of market value and the trend was maintaining an upward direction. Conclusions in studies like the one we previously mentioned have been a strong incentive for the commencement of our research. In a previous published paper by Ratiu and Tirón (2012) we dealt with defining goodwill using a chronological analysis and we continue our research with the analysis of goodwill typologies.
The classification of goodwill has become very important in the latest years, because the approach of each type of goodwill is characteristic to a different...