Issues of Valuing Goodwill as Throughgate of Practicing Earnings Management from the External Auditor's Perspective “An Empirical Study”

Abstract

The accounting treatment and representation of intangible assets, particularly goodwill, has been debated and scrutinized by standard setters, professional organizations, and researchers for several years. Intangible assets are known as not having a physical existence such as factory machines or a building. Intangibles may include patents, copyrights, franchise licenses, trademarks, software developed for internal use, and goodwill. Goodwill is an intangible asset recorded on the balance sheet representing the additional amount paid to acquire an entity over its net fair market valued assets. The escalating numbers of acquisitions increased the amount of goodwill in the financial statement, which catches the attention of financial statement’s users who wants to have more perception of this asset. This perception should be supplied by new accounting rules which create more transparency in goodwill recognition. The presentation of the new accounting standards, International Financial Reporting Standards (IFRS) from 2005 on, has caused great changes in the financial accounting and reporting of the firms. The standard setter, International Accounting Standards Board (IASB) aims that these new standards improve the quality and transparency of financial statements. The changes in accounting for goodwill have great impact on financial statements: goodwill shouldn’t be amortized anymore, but is subject to an annual impairment test. Also, The US GAAP has similar rules for goodwill accounting. The Financial Accounting Standards Board (FASB) releases a new Statement of Financial Accounting Standard 142 (SFAS-142). SFAS-142 revokes goodwill and other indefinite life assets amortization treatment effective for reporting