Accounting for Goodwill: A Critical Analysis of the Impairment-Only Approach

Abstract The present paper addresses the following questions: Is non-arbitrary goodwill impairment testing possible? Would amortization be a better alternative than the impairment-only approach and, if so, should there be case-specific amortization periods or should accounting standards require a uniform amortization period? Empirical evidence suggests that non-arbitrary goodwill impairment testing is not feasible. However, academic literature provides very little in terms of a theoretical debate. To fill this gap, the present paper theoretically substantiates these empirically inspired concerns regarding arbitrariness of goodwill impairment testing and illustrates this substantiation with simple examples. Referring to the question whether an amortization approach is less arbitrary, it theoretically substantiates concerns regarding the arbitrariness of determining case-specific amortization periods. On the basis of this analysis, the paper recommends replacing the impairment-only approach by an amortization approach with uniform amortization periods.