research@hec - Issue#2 - (Page VII)

Goodwill, Accounting, and Governance HOW HAS THE TREATMENT OF GOODWILL EVOLVED OVER THE LAST CENTURY? Our study shows a progressive change in the accounting treatment of goodwill. The four countries studied have gone through four identified phases of goodwill accounting, shifting from the non-recognition of goodwill as an asset at the end of the 19th century to the beginning of the 20th century, to the systematic recognition of goodwill as an asset since the beginning of the new Millennium. The evolution in goodwill treatment can be illustrated by using the theoretical framework developed by Schmalenbach in 19193, which puts forward the concept of the ‘dynamic (versus static) balance sheet’: 1. The pure static phase: it implies that goodwill is a fictitious asset, and applies immediate expensing or rapid amortization (over 5 years). 2. The weakened static phase: this is an adjusted For over a century, accounting regulations have evolved in relation to changes in the economic environment, but the sheer number of changes in the treatment of goodwill over the last few years has raised important questions about the risk of accounting opportunism2. This phenomenon has driven Hervé Stolowy, Yuan Ding, and Jacques Richard to attempt to understand the changes in the treatment of goodwill during the 20th century. How can the evolution of accounting for goodwill1 during the last century be explained? Hervé Stolowy, Yuan Ding, and Jacques Richard have attempted to answer this question by studying the accounting regulations in four leading Western capitalist countries (Great Britain, the United States, Germany, and France) during the 20th century. Based on an interview with Hervé Stolowy and his article ‘Towards an Understanding of the Phases of Goodwill Accounting in Four Western Capitalist Countries: From Stakeholder Model to Shareholder Model’ (to be published in 2008 in the International Journal Accounting, Organizations and Society), co-authored by Yuan Ding (CEIBS, Shanghai, China) and Jacques Richard (Paris Dauphine University). form of non-recognition of goodwill, applying a write-off against equity. 3. The dynamic phase: the underlying assumption is no longer the liquidation of the company but the going concern (dynamic) approach. This implies recognition of goodwill as an asset, with application of amortization over a long period. 4. The actuarial phase: goodwill is maintained as an asset, as its long-term value is recognized and there is no amortization (but it is subject to an annual depreciation test). M HOW CAN THE EVOLUTION IN ACCOUNTING REGULATIONS BE EXPLAINED? This change in the treatment of goodwill can be compared with the evolution of corporate governance practices. It does in fact appear that the recognition of goodwill as a corporate asset is closely linked to the shift from a stakeholder model (a highly concentrated shareholding model where shareholders are mainly the founding families, the state, the bank, or even certain employees) to a shareholder model (a corporate governance model where ownership is dispersed and shareholders are separate from management). There was a progressive shift in the 20th century towards a corporate governance model in which shareholders play a major role, to the detriment of other stakeholders. CAREER Hervé Stolowy teaches financial accounting on various HEC School of Management program (HEC MBA program and the Grande école HEC Master of Science in Management). He also teaches on the HEC doctoral program and runs several PhD courses. He received an ‘ESCP diploma’ (a graduate degree in business administration) in 1979, has a master's in Private Law (University Paris XII Val de Marne), a BA in Russian and American studies (University Paris IV Sorbonne), a PhD in Financial Accounting (University Paris I Panthéon-Sorbonne), and a ‘habilitation à diriger des recherches’ (Qualified Dissertation Adviser) diploma (University Paris XII Val de Marne). He also has an ‘expert comptable’ degree (French CPA). April-May 2008 • research@hec VI http://www.hec.edu/hec/eng/professeurs_recherche/p_liste/p_fiche.php?num=109

Table of Contents for the Digital Edition of research@hec - Issue#2

Cover & Contents
Research Committee: Corporate Involvement in Research Projects
Measuring Market Risks in Banks, by Christophe Pérignon
Being Successful as an Expat in Japan, by Vesa Peltokorpi
Goodwill, Accounting, and Governance, by Hervé Stolowy

research@hec - Issue#2