Negative Goodwill Issues of Financial Reporting and Analysis….pdfVIP

Georgia Tech Financial Analysis Lab 800 West Peachtree Street NW Atlanta, GA 30332-0520 404-894-4395 /finlab Dr. Charles W. Mulford, Director Dr. Eugene E. Comiskey Invesco Chair and Professor of Accounting Callaway Professor of Accounting charles.mulford@ iskey@ Negative Goodwill: Issues of Financial Reporting and Analysis Under Current and Proposed Guidelines By Eugene E. Comiskey and Charles W. Mulford EXECUTIVE SUMMARY Under current GAAP, initial bargain-purchase amounts, also known as negative goodwill (NGW) or the excess of the fair value of acquired net assets over the cost of an acquisition, are typically reduced or eliminated altogether by being allocated against the fair values of certain acquired assets such as property, plant and equipment and intangible assets. Any negative goodwill that is not offset against these assets is reported in the income statement as an extraordinary gain. However, in a joint effort with the International Accounting Standards Board (IASB), the Financial Accounting Standards Board (FASB) has developed a replacement for current GAAP, which, among other things, requires that all NGW, without offset, is to be immediately recognized as a gain. This report outlines the current and proposed accounting treatment of negative goodwill and their impact upon financial statements as well as their implications for financial analysis. For a sample of companies, we find material increases in assets, shareholders’ equity and net income under