Goodwill accounting and performance measurement
Abstract
Purpose
The purpose of this paper is to outline the link between value creation, performance measurement and goodwill accounting according to the International Financial Reporting Standards (IFRS) and United States Generally Accepted Accounting Principles (US‐GAAP). Since economic goodwill is identical to the present value of future residual income, the paper examines how accounting information gathered for impairment testing of goodwill according to International Accounting Standard (IAS) 36 and Financial Accounting Standard (FAS) 142 can be used for internal control purposes.
Design/methodology/approach
The paper adopts common assumptions in the literature of residual income‐based valuation and analytically derives a periodic performance measure of both value creation and its realization based on information available from impairment testing.
Findings
This paper demonstrates that information required by IFRS and US‐GAAP to evaluate a firm's goodwill can be used to design a performance measurement system which provides information about both value creation and realization of value.
Practical implications
From a practical perspective, the paper shows that appropriate adjustments of data used in impairment testing result in information which ideally fits the requirements of an optimal performance measurement system.
Originality/value
The paper presents a performance measure which provides information about the actual creation of value as well as its realization in a period and is superior to traditional residual income‐based performance measures.
Keywords
Citation
Schultze, W. and Weiler, A. (2010), "Goodwill accounting and performance measurement", Managerial Finance, Vol. 36 No. 9, pp. 768-784. https://doi.org/10.1108/03074351011064645
Publisher
:Emerald Group Publishing Limited
Copyright © 2010, Emerald Group Publishing Limited