Equity valuation models and measuring goodwill impairment

The FASB faces 2 main issues in its project on business combinations. The first involves determining whether 2 separate methods of accounting for business combinations - purchase and pooling of interests - are justified, and the second is determining the appropriate method of charging to income the cost of purchased goodwill and other purchased intangibles. In December 2000, the FASB announced its tentative decision to require that acquisition goodwill be periodically tested for impairment and not be subject to systematic amortization. The following month, the FASB announced its tentative decision to eliminate the pooling of interests method of accounting. The issue of goodwill impairment testing is addressed. It is questioned whether impairment testing rather than systematic amortization is the appropriate accounting treatment for acquisition goodwill. It is also examined whether impairment testing for goodwill is a feasible alternative. It is concluded that the inability to separate acquisition goodwill from total enterprise goodwill in the post-acquisition period is a serious impediment to the adoption of an impairment testing approach to goodwill. It is recommended that the FASB's decision on whether to test goodwill for impairment instead of systematically amortizing it, or in addition to systematic amortization, be based on criteria other than the claimed advantages of any valuation model.