Goodwill Accounting Under Knowledge Economy:Theory Research And Standard Improvement

Under knowledge economy, compared with physical capital and money capital, human capital and knowledge cumulative effect make significantly more contribution to the growth of enterprise. Start with the origin of goodwill theory and its economic substance, focus on its relationship with intangible assets, its economic substance and components, its recognition criteria and measurement bases, its presentation and disclosure requirement etc., this article reviews and analyzes domestic and international literature and evolution of accounting standards. This article sorts out the main problems facing in goodwill accounting and points out the issues need to be studying further. By applying inductive and summary method and comparative analysis method, this article makes normative research on goodwill presented in annual reports of listing companies in China. The author discovers the following problems:1. The recognition and initial measurement principles for merger and acquisition goodwill are inconsistent as compared with other assets acquired in business combination. The initial measurement for merger and acquisition goodwill does not conform to the entity theory in consolidation.2. Goodwill acquired in step acquisitions is recognized before the acquiree are actually controlled by the acquirer.3. The recognition and measurement for merger and acquisition goodwill are not completed in complex group structure, such as goodwill in indirect holding subsidiary companies and in multipath holding subsidiary companies.4. The subsequent measurement for goodwill does not fully reflect synergy effect incurred after the acquisition.5. The disclosure requirement relating the presentation on the face of the financial statements and in the notes to the financial statements for goodwill are not clear. In addition, by empirical research on relevant data of annual reports of non-financial listed companies from year2007to2012in domestic capital market, the research make a test of the effects on company's performance of purchased goodwill, and the effects on the relationship between purchased goodwill and the company's performance of market concentration which the companies belong to. The research reveals that, purchased goodwill recognized in accordance with current standards can improve listed companies performance in the purchasing period, but it reduced the listed companies'performance sharply in those subsequent periods except those with highly market concentration degree. In other words, purchased goodwill can improve the listed companies performance within the high market concentration business, however its negative effect on listed companies performance are deferred in those other business. The test result shows that purchased goodwill recognized and measured in china's prevailing standards does not reflect the economic substance of goodwill. Based on the above research and the basic accounting theory, the enterprise competence theory, and the synergy theory, in order to improve and reconstruct the relevant accounting standards relating purchased goodwill, this article presents the following suggestions:1. Definition and classifications of purchased goodwill. It defines the goodwill from the perspective of origin of goodwill and enterprise competence. Goodwill refer to enterprise competence, which accumulates and forms during past going concern or forms through merger and acquisition. This competence is the controllable, current economic resources which bring the enterprise future economic interest and it cannot be individually recognized and traded. Merger and acquisition goodwill refer to the economic resources acquired in the merger and acquisition which are expected to bring the enterprise group future economic interests. These resources are under the control of parent company of enterprise group. They do not have physical form and only can be recognized and measured when attached to acquiree entity. In order to objectively reflect the synergy of merger and acquisition, this article divides merger and acquisition goodwill into the goodwill on the day of merger and acquisition (purchased goodwill) and the goodwill after merger and acquisition. The goodwill after merger and acquisition includes the purchased goodwill which already existed on the day of merger and acquisition and newly increased goodwill results from synergy effect in merger and acquisition (created goodwill). From the quantitative point of view, goodwill after merger and acquisition=goodwill on the day of merger and acquisition+newly increased goodwill after merger and acquisition (synergy effect of merger and acquisition).2. In order to ensure that the accounting standards setting organizations and companies follow the definition and the entity theory requirement of goodwill during the process of merger and acquisition goodwill recognition and measurement, this article proposes the general principle for merger and acquisition goodwill recognition and measurement.3. This article also suggests improvement for recognition and measurement of merger and acquisition goodwill achieved by single transaction, multiple transactions, indirect holding subsidiary company and multipath holding subsidiary company.4. In order to objectively reflect the synergy effect of merger and acquisition, which refer to the changes of the goodwill after merger and acquisition, this article presents principle and method for subsequent measurement of merger and acquisition goodwill.5. This article presents the suggestions for establishing the mechanism of goodwill fair value discovery, valuation and rectification to solve the deviation of enterprise's book value and market value. At present, there are significant difference between listing company's book value and market value and the major reason is that enterprise does not recognize and measure the complete goodwill reflecting enterprise competence. The core problem of merger and acquisition goodwill measurement is the measurement of two fair values, namely, the measurement of the fair value of the whole enterprise and net assets. Appling valuation technique to whole enterprise and its net identifiable assets pricing cannot be individually afforded by all the accounting personnel of enterprise, which means that accounting agencies and accounting personnel on their own strength cannot fulfill this role. Accounting measurement is the core problem of accounting information system. In order to solve the bottleneck problem of accounting development------goodwill accounting, this article applies systematic approach to present the suggestions for establishing the mechanism of goodwill fair value discovery, valuation and rectification and make valuation of goodwill as close as possible to market value. The mechanism of goodwill fair value discovery, valuation and rectification includes three aspects:?the internal enterprise value assessment institution or the professional institution for enterprise value assessment that enterprise entrusts is in charge of valuation for goodwill value of enterprise. They make value assessment every balance sheet day or by the end of a year and provide relative data for accounting institutions. The institution makes rectification at a regular basis according to the feedback from market and professional analysts;?according to related data of goodwill valuation, enterprise accounting institutions and accountants recognize, measure and report the goodwill;?the continual evaluation for fairness, reliability of goodwill and business appraisers'market credit status that market analyst makes as an independent third party.6. This article presents the feature of goodwill as equity and the accounting methods for goodwill equity to objectively reflect the belongingness of goodwill assets equity including the human capital. 7. This article presents the suggestions for improvement to goodwill presentation and disclosure. The current financial reporting system is established on the traditional views of assets, which does not really identify goodwill that reflects competency of enterprise and competitive advantage as an asset and does not reflect goodwill and human capital concept that affect the integrity of accounting information. This article proposes changing balance sheet into statement of financial position and changing liabilities and owner's equity item into liabilities and entity equity item. It adds equity yet to confirm to existing owner's equity to reflect the goodwill value of enterprise including human capital value. Thereinto, the equity yet to confirm reflect the synergy effect result from the integration of acquiring company and acquired company after the merger and acquisition. This equity is not the enterprise capital reserves in general sense. A part of this equity is wealth accumulation under the incomplete contract mechanism in the background of capital wage labor. This part of wealth can be used as stock option or share option incentive, dividend or severance compensation for employees, which shall be separately presented as a part of entity equity, be presented under the interest yet to confirm (goodwill) item in statement of entity equity changes and be presented under the other comprehensive income item in consolidated income statement.