An Investigation of the Significance of Mandated Changes in Goodwill Amortisation Policy in Australia

Abstract

This paper examines the controversy surrounding the use of the Inverted‐Sum‐Of‐Years‐Digits (ISOYD) method of goodwill amortisation and events leading to its banning by the Australian accounting regulatory bodies. Companies using the method claimed that a prohibition would reduce their share price and international competitiveness. On the other hand, efficient capital market proponents argued that the amortisation method was irrelevant to the economic position of a firm in the absence of any cash flow effects. This paper discusses these conflicting views and investigates possible motives for the choice of goodwill amortisation method through a cross‐company analysis of key characteristics. In addition, sharemarket reaction to key events leading to the change of policy was examined using conventional event‐study methodology. The cross‐company analysis revealed significant differences in the goodwill characteristics between ISOYD companies and non‐ISOYD companies which may have motivated their choice. The result of the event‐study found that no significant abnormal return could be unequivocally attributed to any of the key events or announcements.

Citation

Day, R. and Hartnett, N. (1999), "An Investigation of the Significance of Mandated Changes in Goodwill Amortisation Policy in Australia", Pacific Accounting Review, Vol. 11 No. 1/2, pp. 193-218. https://doi.org/10.1108/eb037943