The purpose of this paper is to outline the link between value creation, performance measurement and goodwill accounting according to the International Financial Reporting Standards (IFRS) and United States Generally Accepted Accounting Principles (US‐GAAP). Since economic goodwill is identical to the present value of future residual income, the paper examines how accounting information gathered for impairment testing of goodwill according to International Accounting Standard (IAS) 36 and Financial Accounting Standard (FAS) 142 can be used for internal control purposes.
The paper adopts common assumptions in the literature of residual income‐based valuation and analytically derives a periodic performance measure of both value creation and its realization based on information available from impairment testing.
This paper demonstrates that information required by IFRS and US‐GAAP to evaluate a firm's goodwill can be used to design a performance measurement system which provides information about both value creation and realization of value.
From a practical perspective, the paper shows that appropriate adjustments of data used in impairment testing result in information which ideally fits the requirements of an optimal performance measurement system.
The paper presents a performance measure which provides information about the actual creation of value as well as its realization in a period and is superior to traditional residual income‐based performance measures.
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