Corporate governance and earnings management ... - CEREG

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supporters of the actuarial approach, like the author (Anonymous, 1919, p. 200-201) who wages war on those who see goodwill as “an illusory asset”, and asserts that it “is not subject to depreciation as such”. But the apparent diversity can be misleading: the “weakened” static approach is “in the air”, although the fact that a good many authors defend the actuarial approach (at least from a theoretical standpoint) shows that some of the accounting community were looking for a new way. In spite of that, one can say with an historian of British accounting that in the early part of the 20 th century, at a time when “creditors and long-term investors were regarded as the principal users”, “the use of conservative valuation procedures was advocated by influential contemporary authorities” (Edwards, 1989, p. 110). This weakened static solution was to win the day but remained in the UK the standard approach until the end of the 1980s. Apart from reference to the influence of the dominant doctrine, two facts support this statement: - Firstly, in spite of one attempt to change the situation (a discussion paper dated 1980 with a proposal for capitalization and systematic amortization), at no time were the British lawmakers in a position to impose a solution contrary to the dominant practice (Paterson, 2002b). Furthermore, SSAP 22 (ASC, 1984, revised in 1989) admitted again goodwill to be written off immediately against reserve while (only) offering the possibility of capitalization and amortization against future profits over its “useful economic life”. The first treatment was adopted almost universally (Arnold et al., 1994; Peasnell, 1996). - Secondly, on the whole, this solution seemed to satisfy practitioners. In a 1974 survey of large British companies’ financial statements by the ICAEW, of 209 companies, 129 eliminated goodwill without amortization, (only) 6 amortized it and 72 recorded it in fixed assets and applied no amortization. This proves that the weakened static solution was predominant. However, the existence of a non-negligible practice of keeping 28
goodwill in the balance sheet at (unamortized) cost also shows that even the weakened static solution was not considered satisfactory by a certain number of businesses, and presumably that treating goodwill as an unamortizable asset was approved by certain auditors. In our opinion, the weakened static solution is effectively a “convenient” variant of the purely static approach. Its aim is not to make goodwill an asset, but to make it disappear “softly, softly”. Our view appears to correspond to the position currently defended in Great Britain. Holgate (1990, p. 11) for example, describes how two schools of thought emerged at a discussion by the ASC in 1980 on the treatment of goodwill. One school considered that “goodwill was not like other assets in that it could not be separately realized..., was of no value … and should be written off directly against reserves…” The other school believed “that goodwill was an asset … (on a going concern basis)”. What clearer indication could we wish for that writing off against equity remained a static-type approach! During all that period pooling (or merger accounting) was possible under some conditions but rarely practiced (Paterson, 2001, p. 98). 3.2.2. USA: the “weakened” static phase (1900 - 1970) As in Great Britain, the static approach still dominated in the United States during this period, the basic view being that goodwill was not a real asset and should be made to disappear as soon as possible. This observation which we will support below, is corroborated by one contemporary opponent’s regrets: “current doctrine for the most part holds that, even purchased, goodwill should be written as soon as possible” (Anonymous, 1913, p. 817). However, rather than being charged to expenses, goodwill was increasingly charged against equity, and so the “weakened static approach” began to predominate as it did in England. In theoretical terms, Dicksee’s ideas were widely echoed in the United States, where many authors favored the solution of an immediate write-off against earnings or capital surplus (Kester, 1922, p. 419; Lincoln, 1923; Mac Kinsey & Meech, 1923, p. 538). 29
Page 1 and 2: The four phases of accounting regul
Page 3 and 4: Introduction It was several decades
Page 5 and 6: All the countries examined (with th
Page 7 and 8: another theory to explain standard
Page 9 and 10: supplementary contribution in this
Page 11 and 12: 2.2. The bankers The bankers’ mai
Page 13 and 14: 2.4. The capital markets and profes
Page 15 and 16: produce dramatically different fina
Page 17 and 18: It is thus important to find out wh
Page 19 and 20: The second view, rather larger, con
Page 21 and 22: was “not merely immaterial but al
Page 23 and 24: The first German law concerning goo
Page 25 and 26: Verley (1906, p. 39) considers Fren
Page 27: (1897, p. 46). He arrives at the co
Page 31 and 32: It is also clear that supporters of
Page 33 and 34: Clearly, the “retaining” techni
Page 35 and 36: principally leaning on the fact tha
Page 37 and 38: against equities and even to restri
Page 39 and 40: “balance sheet approach” and sy
Page 41 and 42: stock market capitalism. Tax doctri
Page 43 and 44: The AIA took an even clearer stand
Page 45 and 46: application of this “new” doctr
Page 47 and 48: Arthur Andersen came to the defense
Page 49 and 50: “advantageous” form (eliminatio
Page 51 and 52: confers a certain value” (CNC, 19
Page 53 and 54: the part of companies (Brown, 1998,
Page 55 and 56: condition that these rules will be
Page 57 and 58: IASC and the FASB before 2001. That
Page 59 and 60: lawyers, or bankers defending credi
Page 61 and 62: accounting system has gone from a p
Page 63 and 64: most popular means of funding the i
Page 65 and 66: (due partly to the needs coming fro
Page 67 and 68: 5. Conclusion Our article sets out
Page 69 and 70: Bensadon, D. (2002). La consolidati
Page 71 and 72: Greve, H. (1933). Die Behandlung de
Page 73 and 74: Niehus, R. (1986). Protokoll der ö
Page 75 and 76: Wolff, W. (1967). Accounting for in
Page 77: Figure 2 - Summary: Four phases of

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