Corporate governance and earnings management ... - CEREG

application of this “new” doctrine, at least for goodwill. It was only in the 1960s and 1970s
that the dynamic doctrine came to dominate in treatment of goodwill in a period of slacking
stock markets, and big failures showing that the defence of creditors by the state was no more
the worry of the state which prompted some economics to wonder if the corporation “can
survive” (Jensen & Meckling, 1978).
Although it was not absolute (as we shall see below), this domination is clear in both
regulations and practices. The main explanatory factor is the introduction of particularly
interesting measures for companies. Nelson (1953), a practitioner, develops a “momentum
theory of goodwill” to advocate the amortization of goodwill.
In terms of regulations, the main official document reflecting the domination of dynamic
practices is APB Opinion No. 17 of 1970, which stipulates that “all assets which are
represented by deferred costs are essentially alike in historical-cost based accounting” and
that goodwill, in keeping with this view, must be “amortized by systematic expenses over a
certain period”. This effectively cancelled out the options left open by ARB 43 ch. 5, which
had favored write-offs. It is worth while noting that the same year 1970 the APB adopted the
Statement No. 4, Basic concepts, and specified that “assets also includes certain deferred
charges that are not resources but that are recognized and measured inconformity with
GAAP” (§ 132). At that time this was the definitive victory of the dynamic theory and
goodwill could be at last treated as a respectable cost-asset!
In terms of practices, the study by Hughes (1982) referred to above shows that although the
practice of systematic amortization stagnated from 1958 to 1959, once the regulation of 1970
came into force there was a resulting increase in this type of treatment. It was clearly the
majority choice by 1972, and had become the dominant practice by around 1975.
But it was a hard-won victory. To persuade a majority of companies of the merits of the
dynamic approach, the APB had to allow them to use a very long amortization period for
goodwill: up to 40 years. This was well in excess of the periods proposed by the early
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