A Study On Internally Generated Goodwill Evaluation From The Resource-Based Theory Of The Firm

Since taken into accounting theory fields in the 1920s, Goodwill has been a puzzle in the study of accounting theory and the focus of controversy. Goodwill is recognized by accounting community as one of the special economic resources, which have a major impact on the present earning and future development of companies. But how to define the nature of goodwill, what should be the accounting treatment of goodwill and how to measure goodwill value are all the issues to be solved. With the advent of knowledge economy and the information age, the proportion of goodwill in total assets of a company is growing rapidly. The waves of mergers and acquisitions among enterprises give birth to mega-amount purchased goodwill, while the value of purchased goodwill is rooted in the internally generated goodwill. As a result, the measurement of internally generated goodwill is particularly important. Because of the characteristic of adherence, integrity and risk, the value of internally generated goodwill is hard to measure accurately, which poses a challenge to researchers of the modern accounting theory and practice.Based on "Resource-Based Theory of the Firm "-an emerging school in strategic management area, this paper conducted in-depth discussions on internally goodwill issues such as, essence,accounting recognition,disclosure,measurement, etc. In the writer's opinion, internally generated goodwill is a value reflection of specific intangible resources and corporate capability, which plays a role to increase the value of corporate assets on the basis of corporate assets. Internally generated goodwill is not suitable to the definition of "assets", while the knowledge of it is extremely important to financial report users. For these two reasons, this paper proposed a disclosure of internally generated goodwill information outside the financial statement. Then, the paper focused on internally generated goodwill measurement issue.From the nature of internally generated goodwill explained by "Resource-Based Theory of the Firm", the value of internally generated goodwill is changing continuously along with the changes of industrial environment and business conditions. But traditional methods of measurement of goodwill cannot reflect the dynamic changing characteristics of internally generated goodwill satisfactorily. This paper suggested that option theory be applied to measurement of internally generated goodwill. The paper viewed corporate equity as a call option based on the total corporation value. The Black-Scholes option pricing model was used to calculate the value of the shares. Then the equity value was subtracted from stock market value, the rest represented the value of the corporation's internally generated goodwill. The paper offered a detailed analysis of this approach based on the financial statement data and the stock market closing price data of Huiquan Beer Group in 2003, which made some recommendations for the puzzle of internally generated goodwill measurement.