Is Amortization Good Enough? Evidence from the U.K. Goodwill Accounting

Before 2001, the accounting practitioners generally amortize the cost of intangibles over an arbitrary decided period of time. The accounting treatment lies in two perspectives: first, the value of goodwill will eventually decline; second, the recognition of amortization expenses is to meet the requirement of matching principle. However, later research indicates that the value of goodwill does not necessarily fall afterwards, and may even increase under certain circumstances. ‘Impairment Testing’ is thus introduced to replace ‘amortization’ to reflect the true and fair view of assets values. However, impairment testing is liable to manipulation and may impose huge costs on firms, when they have frequent mergers and acquisitions activities. This paper empirically examine whether the old fashion way – amortization of recognizing the depreciation of intangible assets can serve the function, given ‘impairment testing’ is costly and manipulative? The empirical evidence indicates positive answer to the above question.