Reviewed by Gyan Chandra Miami University, Ohio
Accounting for goodwill has been one of the most intriguing problems faced by accountants. A number of accounting theoreticians have tried to define and value it over the last one hundred years or so and yet the subject has remained elusive. The controversy surrounding its treatment has a tendency of fading and flaring up every now and then. Originally submitted as a Ph.D. disserta-tion, Hughes’s monograph (after suitable revisions in the dissertation) on Goodwill in Accounting offers a rich and extensive review of the literature on the subject.
The author’s principal objective of the study is “to develop a cohesive and comprehensive history of the issues and problems related to accounting concept and treatment of goodwill” (p. 2). He chose the period beginning with the 1880s for his study and has divided the study into nine chapters. After introducing the subject and providing a brief background in the first two chapters, he reviewed the history of the developments in the next five chapters. The last two chapters are devoted to the inquiry into the nature of goodwill in the present day context and to the conclusions of the study. This reviewer considers the middle five chapters on the historical developments as the crux of the monograph. The historical review has been divided into five segments: 1884-1909; 1910-1929; 1930-1944; 1945-1957; and 1958-1980. A chapter is devoted to each of these segments and the author has organized the review by issues concerning the business environment, the accounting envi-ronment, initial valuation of goodwill, its subsequent treatment, its financial presentation and disclosure, its auditing considerations, and its tax considerations.
Hughes starts the study with a working definition of goodwill (i.e., it represents an above-average ability to make a profit, has no physical substance and is a product of its environment) and traces its developments all the way from manorial times until its first legal definition given in an English court in 1810. The first accounting article on goodwill seems to have been published in 1884 and the first book on the subject was published in 1897. American authors started writing about it at the turn of the 20th century. By the 1930s, goodwill had become a full-fledged controversial subject attracting much attention of professional accountants and academe. The accountants openly debated the question of its initial valuation and subsequent treatment. Finally, in 1944, the AICPA’s Committee on Accounting Procedure issued Accounting Research Bulletin No. 24 requiring cost to be the basis for all intangibles. However, the con-troversy continued on the question of its subsequent treatment. ARB No. 24 presented a compromise, “Amortization, though permitted, was neither encouraged nor discouraged and was given about equal stature with permanent retention” (p. 115). The author gives a rich account of the controversy surrounding pooling of interests vs. purchase of business accounting and its implications on goodwill. He has extensively traced the developments leading to the issuance of Accounting Principles Board Opinions No. 16 and 17. Opinion No. 17 requires amortization of goodwill over a maximum period of 40 years which seems to have settled the issue of its subsequent treatment.
The author has used the inductive approach in reviewing the historical developments and the deductive approach in developing a basic framework for analyzing the nature of goodwill. He uses Veblen’s institutional theory and Galbraith’s contemporary interpretation of business to analyze the concept of goodwill. He summarizes his analysis in the following definition of goodwill: “a differential advantage accruing to a corporation in terms of its dominant goals—the ability to generate superior profits by whatever means to finance the technostructure’s growth, usually by selling goods through purposeful manipulation of the consumer’s customs and habits” (p. 194).
The monograph is a well written treatise and offers a rich commentary on the contemporary business environment. The review of the literature from 1958-1980 throws light not only on the technical developments but also on the profession and personalities. The author claims to have reviewed approximately 1,000 books and articles and the extensive bibliography provided could be very helpful in future research in accounting theory. Publications of the American Accounting Association, AICPA, Briloff, Canning, Catlett and Olson, Dicksee, Galbraith, Gilman, Hatfield, Leake, May, Montgomery, Moonitz, Paton, Spacek, Veblen, Yang, and many others have been extensively reviewed and quoted. The monograph is not limited to goodwill alone. It should be considered more on goodwill in accounting theory through the ages and as such it is a part of the broad subject of accounting theory. It is concise and interesting. This reviewer was impressed by the extensive review of the literature on the subject and will recommend it to serious students of accounting theory. The reviewer wishes the author had also added a chapter on the normative approach to goodwill in accounting. But, as the author says, the last chapter has not been written on the subject. “The jury is still out” and hopefully the monograph will encourage others to work in the area.
