Corporate governance and earnings management ... - CEREG

grounds that the effective usefulness of intangibles is of indefinite duration. It is claimed, and
rightly so, that no one knows exactly when goodwill value ceases to exist. Hence, it is the
lesser of evils to allow the only objectively determined valuation available (i.e. original cost)
to be shown in the balance sheet”.
How can the very specific situation in France be explained The answer is well-known in
international accounting circles. Whereas in countries like Great Britain and the United States,
where the stock exchange played a major role, the need to dissociate taxable income from
“financial” income soon became clear, this was not the case in France, a country where the
capital markets played only a minor role in business financing, at least until the 1960s. This
meant there was no great resistance to tax rules affecting accounting, particularly as in most
cases they led to lower taxable income than “economic” or “financial” accounting rules. It is
true that non-amortization of goodwill was an “anomaly”, but this anomaly had come to be
accepted as a “negative” component of the deal (at least in tax terms), to be taken together
with “positive” components that were beneficial to taxpayers (for instance, the capacity to
deduct start-up, research and advertising costs immediately, and depreciate many tangible
assets rapidly).
But the growing importance of consolidated financial statements considerably reduced the
influence of taxation as far as goodwill was concerned. Nobes and Norton (1996, p. 186-188)
rightly point out “it is in the discussion of tax treatments that the confusion between the
different types of goodwill becomes serious. The vital initial point is that, in all countries,
consolidated financial statements as prepared for financial reporting purposes are irrelevant
for tax purposes … In most countries, corporate income tax is calculated company by
company … Since the consolidated income statement is not directly relevant for tax purposes,
and since amortization charges for consolidation goodwill only appear in such statements,
then such charges are not tax deductible …”.
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