Goodwill, Accounting, and Governance

Hervé Stolowy, Professor of Accounting - April 15th, 2008
Accounting - Stolowy

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 leadingWestern capitalist countries (Great Britain, the United States, Germany, and France) during the 20th century. 

Hervé Stolowy ©HEC Paris

Hervé Stolowy joined HEC Paris in 1994. A graduate of ESCP and a certified public accountant (France), Stolowy also holds a Ph.D. in financial accounting from Panthéon-Sorbonne (...)

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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. 


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 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 ismaintained as an asset, as its long-termvalue is recognized and there is no amortization (but it is subject to an annual depreciation test).


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 shareholdingmodel 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 governancemodel in which shareholders play a major role, to the detriment of other stakeholders.


This transition conflicts with current managerial theories that stipulate active roles for all stakeholders, to the detriment of shareholders' roles. On the contrary, we think that the increasingly major role played by capital markets favors the expansion of a governance model where ownership is dispersed and shareholders have little or no involvement in corporate decision making. They have less visibility over the firm's future (and therefore their investment), and are thus more focused on its (short-term) financial performance. This contrasts with amore highly concentrated stakeholder governance model where the company's shareholders are concerned with long-term financial viability and economic performance.


There is in effect little point in attempting to explain accounting changes without first understanding the environment in which they occurred. Accounting regulations are directly linked to changes in the economic, social, technological, and political environments of organizations. For example, France entered the actuarial phase from 1917, almost 90 years before the other countries. Was France more ‘advanced’ than the other countries? I don't think so, but the French taxation systemencouraged companies to recognize goodwill as an asset. We therefore recommend a better analysis of the environment by the accounting standard-setter, so that regulation is placed on amore rational foundation and standardsmatch the environment. It's all the more important, especially if the environment has an impact on accounting standards. The opposite is also true: it is evident, for example, that today's actuarial method favors short-term profit by not generating expenses on accounts (except loss of value following a depreciation test).

Based on an interview with Hervé Stolowy and his article "Towards an Understanding of the Phases of Goodwill Accounting in FourWestern 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). 

1. The difference between the purchase price and the sum of the fair value of the net assets is by definition the value of the ‘goodwill’ of the purchased company. This difference does not reflect the purchased company's balance sheet but intangible (non-monetary) assets, such as the prospect of future profits fromsynergies or the quality of the purchased company'smanagement team.

2. J. Richard and H. Stolowy: “Le goodwill, ou l’opportunisme comptable (goodwill or accounting opportunism)”, Le Monde , 4 June 2002, p. VI.

3. Eugen Schmalenbach, Grundlagen dynamischer Bilanzlehre (dynamic accounting theory), Zeitschrift für handelswissenschaftliche Forschung  (scientific journal), 1919. 


Hervé Stolowy, Jacques Richard, and Yuan Ding studied the regulation of goodwill accounting in Great Britain, the United States, Germany, and France, covering a period from 1880 to the present day. The objective of their research is to demonstrate that the evolution in corporate governance models (from stakeholder model to shareholder model) influences the accounting treatments of goodwill. The data was obtained from an in-depth analysis of academic accounting literature since the end of the 19th century.