Corporate governance and earnings management ... - CEREG

proponents of the dynamic approach, and the average term of investments. Kripke, among
others, believed that a suitable maximum term would be 20 years (in Catlett & Olson, 1968, p.
142). The APB’s 40-year maximum was generally understood to be a “compromise”, granted
to companies as an incentive to replace the old write-off method (Arthur Andersen, 1970, p.
4; quoted in Hughes, 1982, p. 149) (and in our opinion, this change of method was beneficial
for the companies). It must be remembered that this compromise took place in an environment
where many companies were actively seeking an even “better” solution.
c) Continued opposition
It is always difficult to satisfy all companies, as they all operate in different conditions.
APB 17 was adopted by 13 votes for over 5 against, indicating significant “resistance” to the
dynamic approaches. The other traditional views in the history of goodwill treatment in the
Unites States – the static view and the actuarial view – not only made their presence felt but
additionally gained a certain degree of recognition by being prepared to adapt, and proposing
solutions that were even more beneficial than the dynamic approach.
Resistance by the static view
For some companies, busy around 1970 with massive mergers on a scale the United States
had never seen before, the prospect of having to amortize enormous amounts of goodwill –
even over 40 years – was problematic. The immediate reduction in income that would result
was felt to be a less satisfactory solution than a reduction in reserves or equity. These
companies, specifically in the high-inflation environment of the time, contended that the
result of purchase accounting and systematic amortization of goodwill “is to destroy
earnings”, and “the public will not readily accept the concept that earnings are destroyed”
(Kripke, in Catlett & Olson, 1968, p. 128). In fact, they argued, “it is likely that many of the
business combinations … would not have occurred if purchase accounting and amortization
of the resulting goodwill had been required” (Catlett & Olson, 1968, p. 53).
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