The function of accounting is to provide users with useful information in making economic decisions. Information regarding goodwill, a major constituent of the value of many listed companies, is likely to be useful in making decisions relating to those companies. A historical review of accounting literature, including professional standards, relating to methods of accounting for purchased goodwill showed that none of them has stood the test of time. The current trend towards an impairment paradigm will not resolve the issue satisfactorily because it produces, at best, a partial solution. The difficulty in accounting meaningfully for goodwill is compounded because, given its foundation in historical cost principles, accounting has been unable to present any information at all with regard to internally generated goodwill within the confines of the traditional Balance Sheet. This, in turn, has led to the evasion of the reality that the two forms of goodwill are inextricably merged. Trying to account satisfactorily for goodwill has been a prime example of R.R. Sterling�s �issues conceived in a way that they are in principle unresolvable�. The problem was accordingly redefined as being to find a method by which the current level of information relating to goodwill in the financial statements contained in a company�s Annual Report could be improved. This thesis seeks to identify a logically defensible method of accounting for goodwill which addresses the redefined problem. It builds upon the historical research undertaken, combined with a priori reasoning, to propose an additional financial statement which is a modification of nineteenth century �double accounting� in a modern context. This statement, which goes far to solve the redefined problem, also furnishes information regarding the company�s market capitalization at balance date and is termed the Market Capitalization Statement (�MCS�). While the idea of furnishing market capitalization data to readers of the Annual Report is not new, it is believed that this is the first time such data has been systematically linked with the Balance Sheet to provide an objective, integrated and meaningful view of goodwill in the financial statements. The practical application and simplicity of the MCS are illustrated by a range of examples drawn from Australian �dot-com� companies over a period of time which saw considerable fluctuation in both goodwill and market capitalization, supplemented by examining data relating to some of Australia�s largest listed companies over the same period. These examples demonstrate that the MCS has the potential to provide significant information not available in conventional financial statements, while freeing the traditional Balance Sheet and Profit and Loss Account to present information in a more meaningful and less distorted way. Finally, the MCS is noted as still being subject to certain problems and distortions in the context of the historical cost basis of the remaining financial statements. It is shown that, if used in the context of an exit price based system, Chambers� CoCoA, many of these distortions are removed. The MCS also complements the information provided by CoCoA as originally formulated.

The function of accounting is to provide users with useful information in making economic decisions. Information regarding goodwill, a major constituent of the value of many listed companies, is likely to be useful in making decisions relating to those companies. A historical review of accounting literature, including professional standards, relating to methods of accounting for purchased goodwill showed that none of them has stood the test of time. The current trend towards an impairment paradigm will not resolve the issue satisfactorily because it produces, at best, a partial solution. The difficulty in accounting meaningfully for goodwill is compounded because, given its foundation in historical cost principles, accounting has been unable to present any information at all with regard to internally generated goodwill within the confines of the traditional Balance Sheet. This, in turn, has led to the evasion of the reality that the two forms of goodwill are inextricably merged. Trying to account satisfactorily for goodwill has been a prime example of R.R. Sterling�s �issues conceived in a way that they are in principle unresolvable�. The problem was accordingly redefined as being to find a method by which the current level of information relating to goodwill in the financial statements contained in a company�s Annual Report could be improved. This thesis seeks to identify a logically defensible method of accounting for goodwill which addresses the redefined problem. It builds upon the historical research undertaken, combined with a priori reasoning, to propose an additional financial statement which is a modification of nineteenth century �double accounting� in a modern context. This statement, which goes far to solve the redefined problem, also furnishes information regarding the company�s market capitalization at balance date and is termed the Market Capitalization Statement (�MCS�). While the idea of furnishing market capitalization data to readers of the Annual Report is not new, it is believed that this is the first time such data has been systematically linked with the Balance Sheet to provide an objective, integrated and meaningful view of goodwill in the financial statements. The practical application and simplicity of the MCS are illustrated by a range of examples drawn from Australian �dot-com� companies over a period of time which saw considerable fluctuation in both goodwill and market capitalization, supplemented by examining data relating to some of Australia�s largest listed companies over the same period. These examples demonstrate that the MCS has the potential to provide significant information not available in conventional financial statements, while freeing the traditional Balance Sheet and Profit and Loss Account to present information in a more meaningful and less distorted way. Finally, the MCS is noted as still being subject to certain problems and distortions in the context of the historical cost basis of the remaining financial statements. It is shown that, if used in the context of an exit price based system, Chambers� CoCoA, many of these distortions are removed. The MCS also complements the information provided by CoCoA as originally formulated.

The principal goal of this research study was to critically evaluate the current accounting treatment of purchased goodwill in terms of a theoretical framework established, including an evaluation of the true nature of goodwill. The main conclusion of this study is that goodwill is an intangible asset representing various intangible factors contributing to the enterprise's earning capacity and providing returns in excess of a normal return on assets employed for which an acquiring enterprise is willing to pay an amount in excess of the fair value of the identifiable net assets acquired. The cost of purchased goodwill is measured as the difference between the total purchase price and the fair value of the net assets acquired after ensuring that all assets, tangible and intangible, had been properly identified. Purchased goodwill should be amortised over the estimated period that the enterprise is expected to benefit from the acquisition of the goodwill. / Financial Accounting / M. Com. (Accounting Science (Applied Accountancy))

The principal goal of this research study was to critically evaluate the current accounting treatment of purchased goodwill in terms of a theoretical framework established, including an evaluation of the true nature of goodwill. The main conclusion of this study is that goodwill is an intangible asset representing various intangible factors contributing to the enterprise's earning capacity and providing returns in excess of a normal return on assets employed for which an acquiring enterprise is willing to pay an amount in excess of the fair value of the identifiable net assets acquired. The cost of purchased goodwill is measured as the difference between the total purchase price and the fair value of the net assets acquired after ensuring that all assets, tangible and intangible, had been properly identified. Purchased goodwill should be amortised over the estimated period that the enterprise is expected to benefit from the acquisition of the goodwill. / Financial Accounting / M. Com. (Accounting Science (Applied Accountancy))