Accounting for Goodwill: What Factors Influence Management Preferences?

Abstract

This paper investigates factors that determined the position of senior managers of UK-listed companies in the heated debate surrounding proposals for a new standard on goodwill accounting, i.e. whether managers preferred the immediate write-off of goodwill to reserves or capitalisation and amortisation. Our results provide support for factors derived from contracting cost theory, including those associated with debt covenants and management compensation schemes, and transaction costs. However, we also find that perceived information effect factors, i.e. those based on managements' beliefs about the impact goodwill accounting would have on market perceptions of their companies, may constitute a stronger influence on their preferences.