Description
The objective of this paper is to illustrate that the change in shareholders’ attitude towards firms (from stakeholder
model to shareholder model) influences the accounting treatments of goodwill. Our study is based on four countries
(Great Britain, the United States, Germany, and France) and covers more than a century, starting in 1880.
Towards an understanding of the phases of
goodwill accounting in four Western capitalist countries:
From stakeholder model to shareholder model
Yuan Ding
a
, Jacques Richard
b
, Herve´ Stolowy
c,
*
a
China-Europe International Business School (CEIBS), Shanghai, China
b
University of Paris-Dauphine, France
c
HEC School of Management, Paris, France
Abstract
The objective of this paper is to illustrate that the change in shareholders’ attitude towards ?rms (from stakeholder
model to shareholder model) in?uences the accounting treatments of goodwill. Our study is based on four countries
(Great Britain, the United States, Germany, and France) and covers more than a century, starting in 1880. We explain
that all these countries have gone through four identi?ed phases of goodwill accounting, classi?ed as (1) ‘‘static’’ (imme-
diate or rapid expensing), (2) ‘‘weakened static’’ (write-o? against equity), (3) ‘‘dynamic’’ (recognition with amortiza-
tion over a long period) and (4) ‘‘actuarial’’ (recognition without amortization but with impairment if necessary). We
contribute several new features to the existing literature on goodwill: our study (1) is international and comparative, (2)
spans more than a century, (3) uses the stakeholder/shareholder models to explain the evolution in goodwill treatment
in the four countries studied. More precisely, it relates a balance sheet theory, which distinguishes four phases in
accounting treatment for goodwill, to the shift from a stakeholder model to a shareholder model, which leads to the
preference for short-term rather than long-term pro?t, (4) contributes to the debate on whether accounting rules simply
re?ect or arguably help to produce the general trend towards the shareholder model, (5) demonstrates a ‘‘one-way’’
evolution of goodwill treatment in the four countries studied, towards the actuarial phase.
Ó 2007 Elsevier Ltd. All rights reserved.
Introduction
In positive accounting literature, the ‘‘stake-
holder model’’ and ‘‘shareholder model’’ concepts
have been emphasized (Ball, Kothari, & Robin,
2000, p. 243) to explain certain properties of
accounting earnings (timeliness, conservatism).
0361-3682/$ - see front matter Ó 2007 Elsevier Ltd. All rights reserved.
doi:10.1016/j.aos.2007.07.002
*
Corresponding author. Tel.: +33 1 39 67 94 42; fax: +33 1
39 67 70 86.
E-mail address: [email protected] (H. Stolowy).
Available online at www.sciencedirect.com
Accounting, Organizations and Society 33 (2008) 718–755
www.elsevier.com/locate/aos
The stakeholder model (usually related to code-law
countries) is a highly concentrated shareholding
model where shareholders are mainly the founder
families, the state, the bank or even employees
and are actively involved in management of the
company. The shareholder model (usually related
to common-law countries) is not used as a legal
term, but refers to a speci?c corporate governance
model where ownership is dispersed and sharehold-
ers are separate from management. This literature
o?ers us an interesting framework for analysing
how the changes in actors’ forms of calculation
impact accounting regulations (Robson, 1993).
Taking the accounting treatment for goodwill
as an emblematic illustration, this article sets out
to show that the direct associations between the
stakeholder model and code-law countries, on
the one hand, and between the shareholder model
and common-law countries, on the other hand, are
open to debate. Based on a social and historical
study of four countries which have played a major
role in the Western world economy during the 20th
century, Great Britain, the United States, Ger-
many and France, we show that rather than corre-
sponding to a clear dichotomy between common-
law and code-law countries, these two models of
corporate governance relate to a gradual shift:
the stakeholder model was present in all four
countries, and has evolved over time into the
shareholder model. More precisely, we demon-
strate that the four countries studied have a com-
mon starting point (stakeholder model), a time
when shareholders were mainly insiders actively
involved in management; and from that point,
due to the capital markets’ current importance,
all of them have made their way to the common
destination of professionalization of management
and investors (shareholder model), but by di?erent
routes and at di?erent paces.
Leake (1914, p. 81) pointed out that the ‘‘word
‘Goodwill’ has been in commercial use for centu-
ries’’ and cited a reference from the year 1571.
Without looking so far back, our study still covers
a period of more than a century, starting from the
1880s. Hughes (1982, p. 24) tells us that ‘‘account-
ing literature on goodwill appeared in . . . periodi-
cals or newspapers, such as The Accountant
[which] started in 1874’’.
Our paper concentrates on ‘‘acquired good-
will’’: acquired either individually (goodwill pur-
chased when buying assets other than by buying
shares in a company [non-consolidation goodwill])
or in a business combination (goodwill purchased
by a group when buying shares in a company [con-
solidation goodwill]) (Nobes & Norton, 1996, p.
180). Internally generated goodwill is not covered,
as it involves speci?c issues in addition to those
relating to acquired goodwill (see Jennings &
Thompson, 1996).
Many articles observe a wide diversity in both
the regulations and treatments applied in practice
to goodwill (Arnold, Eggington, Kirkham, Macve,
& Peasnell, 1994; Catlett & Olson, 1968; Cooper,
2007; Hughes, 1982). In the United States, Walker
(1938a) provides tables showing prevailing prac-
tices and the diversity in the treatment of goodwill
in the balance sheet.
It is always di?cult to divide prevailing
accounting treatment into clearly dated phases.
For this study, we decided to take a time of funda-
mental change as the start of a phase. That change
generally concerns accounting regulations: newly
issued standards or exposure drafts that would
later lead to the ?nal standard constitute our pri-
mary sources. However, for the early stages (late
19th century and early 20th century) before formal
accounting regulation of goodwill, our sources are
court rulings and discussion papers written by
leading scholars of the period (‘‘doctrine’’). We
determine the phases on the basis of these
elements.
In this article, we relate the stakeholder/share-
holder models to a ‘‘balance sheet theory’’, devel-
oped by continental European scholars such as
Schmalenbach (1908) with his concept of the
‘‘dynamic (vs. static) balance sheet’’. We extend
these concepts to identify four phases in account-
ing treatment for goodwill. All the countries exam-
ined went through an initial phase that can be
classi?ed as ‘‘static’’: the idea was that the balance
sheet should relate to the ‘‘end’’ of the ?rm, with
items measured on the basis of liquidation value.
This phase is marked by great reluctance to see
goodwill as a true asset. In principle, this
‘‘unsightly, unwieldy and ‘un-valuable’ asset’’, to
borrow Dicksee’s expression (1897, p. 47), was to
Y. Ding et al. / Accounting, Organizations and Society 33 (2008) 718–755 719
be expensed immediately or at least rapidly. In the
second phase, which we call ‘‘weakened static’’,
goodwill was made to disappear within a short
time of acquisition, but by means of a write-o?
against equity. The third phase, called ‘‘dynamic’’,
as it refers to the going concern (dynamic) assump-
tion, saw widespread amortization of goodwill
over a relatively long period. Finally, during the
fourth, ‘‘actuarial’’ phase, goodwill came to be rec-
ognized as an asset, with no systematic reduction
of value.
Both individual corporate accounts and consol-
idated accounts are considered. This study
expands on previous literature on goodwill in ?ve
ways. First, it takes an international, comparative
approach, focusing as it does on four countries.
Second, it spans more than a century, starting in
1880. Third, it uses the stakeholder/shareholder
models to explain the evolution in goodwill treat-
ment in the four countries studied. More precisely,
it relates a balance sheet theory, which distin-
guishes four phases in accounting treatment for
goodwill, to the shift from a stakeholder model
to a shareholder model. The result of this general
trend is the preference for short-term rather than
long-term pro?t. This idea is consistent with the
works of economists (Lazonick & O’Sullivan,
2000) who show that in the US, companies have
gone from a ‘‘retain-and-reinvest’’ attitude (prefer-
ring immediate expenses to favour long-term
pro?t) to a short-term pro?t orientation with dis-
tribution of dividends, explaining the move from
a static phase to a dynamic and actuarial
approach. Fourth, the article contributes to the
debate about whether accounting rules simply
re?ect or arguably help to produce the general
trend towards the shareholder model. Finally, we
demonstrate a ‘‘one-way’’ evolution of goodwill
treatment in the four countries studied, towards
the actuarial phase.
The remainder of this paper is organized as fol-
lows. The ?rst section describes the existing litera-
ture on accounting regulation and the social
nature of accounting which serves as the theoreti-
cal basis of our analysis. The second section is ded-
icated to the stakeholder/shareholder models and
their relationship with the balance sheet theory
referred to earlier. This conceptual framework is
applied to the four phases of accounting treatment
for goodwill. The third section examines these four
historical phases of accounting for goodwill in
four countries, and explains their successive devel-
opment. This is followed by a discussion section
and a ?nal section concluding the article.
Accounting regulation and the social nature of
accounting
Theories explaining accounting regulation
For decades, accounting regulation has been
arousing interest among researchers. Booth and
Cocks (1990, p. 511) examine accounting stan-
dard-setting and note that its study has been pur-
sued from the perspective of ?ve general research
traditions: professional logic, neo-classical eco-
nomics, cognitive psychology, the market for
excuses and political lobbying. Lobbying has been
extensively invoked in explaining standard-setting
(McLeay, Ordelheide, & Young, 2000; Sutton,
1984; Tutticci, Dunstan, & Holmes, 1994; Van
Lent, 1997; Weetman, Davie, & Collins, 1996;
Ze?, 2002). The concept of ‘‘interest groups’’ has
also been developed (Walker, 1987) and enriched
(Robson, 1993). Con?icting agendas (Walker &
Robinson, 1994a) or inter-organizational con?ict
(Walker & Robinson, 1994b) may also explain
standard-setting. Booth and Cocks propose a
power analysis (1990, p. 524).
Nobes (1992), setting out to explain the history
of goodwill in the UK, proposes a cyclical model
of standard-setting as a political process in?uenced
by six parties: corporate managers, auditors, users,
government, international opinion and upward
force. Bryer (1995) develops another theory to
explain standard SSAP 22 (ASC, 1984) on
accounting for goodwill: he employs concepts
from Marx’s political economy.
Many authors have stressed the political aspects
of standard-setting: Hope and Gray (1982) empha-
size the role of power in the development of an
R&D standard; Laughlin and Puxty (1983) ana-
lyze the political process of standard-setting in
the light of the problem of the conceptual frame-
work and its viability; Power (1992) discusses
720 Y. Ding et al. / Accounting, Organizations and Society 33 (2008) 718–755
brand accounting in the United Kingdom; Will-
mott, Puxty, Robson, Cooper, and Lowe (1992)
theorize the process of accounting regulation and
the processes of social and political regulation gen-
erally, taking accounting for R&D in four
advanced capitalist countries as an example;
Fogarty, Hussein, and Ketz (1994), in the US,
develop an approach based on power, ideology
and rhetoric; Klumpes (1994) analyses the politics
of rule development in the case of Australian pen-
sion fund accounting rule-making. Walker and
Robinson (1993) review this literature. Harrison
and McKinnon (1986) use change analysis to
reveal the attributes and essential properties of
regulation in a speci?c nation.
The political and economic consequences of
accounting have also come under consideration
(Solomons, 1978, p. 68; Solomons, 1983; Ze?,
1978, p. 60).
Social nature of accounting
It was several decades ago that accounting
ceased to be considered as a pure technique
and came to be seen as an instrument for social
management and change (Burchell, Clubb, Hop-
wood, Hughes, & Nahapiet, 1980; Hopwood,
1976, Preface; Puxty, Willmott, Cooper, & Lowe,
1987), i.e. a ‘‘social rather than a purely technical
phenomenon’’ (Burchell, Clubb, & Hopwood,
1985, p. 381). Hopwood (1976, p. 1), for exam-
ple, says ‘‘the purposes, processes and techniques
of accounting, its human, organizational and
social roles, and the way in which the resulting
information is used have never been static. (. . .)
They have evolved, and continue to evolve, in
relation to changes in the economic, social, tech-
nological and political environments of
organizations’’.
Harrison and McKinnon (1986, p. 233) point
out that ‘‘since the early 1970s, policy formulation
has been viewed as a social process; i.e. as the out-
come of complex interactions among parties inter-
ested in or a?ected by accounting standards’’.
They refer to Watts and Zimmerman (1978), Holt-
hausen and Leftwich (1983) and Kelly (1983). In
their work on value added in the United King-
dom, Burchell et al. (1985) review some existing
theories of the social nature of accounting and
conduct a social analysis. In the same vein, for
Burchell et al. (1980), ‘‘accounting change increas-
ingly emanates from the interplay between a series
of institutions which claim a broader social signif-
icance’’. Taking a di?erent approach (based on
Historical Materialism), Tinker, Merino, and
Neimark (1982) also argue that accounting is not
neutral and that accountants ‘‘have been unduly
in?uenced by one particular viewpoint on eco-
nomic thought (utility based, marginalist econom-
ics) with the result that accounting serves to
bolster particular interest groups in society’’
(p. 167).
As Burchell et al. say (1985, p. 381), ‘‘although
the relationship between accounting and society
has been posited frequently, it has been subjected
to little systematic analysis’’. We believe there is
still some room for further contributions in this
?eld. In this study, using goodwill as an example,
we try to illustrate how the rise of the shareholder
model has in?uenced accounting treatment.
This entire stream of literature emphasizes the
in?uence of the social context on accounting.
However, there could be a reverse e?ect: an in?u-
ence exerted by accounting on the general econ-
omy and social trends. The work by Burchell
et al. (1985, p. 381) already quoted above also
demonstrates that ‘‘accounting, in turn, also has
come to be more actively and explicitly recognized
as an instrument for social management and
change’’ (p. 381). One of their contributions is to
highlight the intermingling of accounting and the
social (p. 382). Tinker et al. (1982) also mention
this interrelation, although more brie?y, in stating
that accountants bear a responsibility ‘‘for shaping
subjective expectations which, in turn, a?ect deci-
sions [our emphasis] about resource allocation,
and the distribution of income between and within
social classes’’ (p. 188).
While Willmott et al. (1992)’s analysis concen-
trated on accounting, social and political regula-
tions, taking accounting for R&D as an example,
we will focus on accounting treatment and regula-
tions on goodwill. We will also attempt to build on
Burchell et al.’s work (1985) by showing the
reverse in?uence of accounting on the social where
goodwill is concerned.
Y. Ding et al. / Accounting, Organizations and Society 33 (2008) 718–755 721
Conceptual framework of analysis: stakeholder/
shareholder models, balance sheet theory and
goodwill
Our framework of analysis is based on the
stakeholder/shareholder models, which are associ-
ated with the balance sheet theory as applied to the
accounting treatment for goodwill.
Stakeholder/shareholder models
In this article, we enter the stakeholders vs.
shareholders debate (see, e.g., Driver & Thomson,
2002), taking the view that the evolution in regula-
tions governing treatment of goodwill can be
explained by the rise of the shareholder model
and ‘‘constellations of material and ideological
forces that are present within di?erent nations’’
(Puxty et al., 1987).
The origin of this dichotomy theory can be
traced back to the debate between Berle and Dodd
on corporate accountability (Macintosh, 1999).
During the 1930s, Berle and Dodd, two American
law professors, publicly debated the question ‘‘to
whom are corporations accountable?’’ (Berle,
1932; Dodd, 1932). Berle’s opinion was that the
management of a corporation could only be held
accountable to shareholders for their actions.
Dodd believed that corporations were accountable
to both their shareholders and the society in which
they operated. Macintosh (1999) suggests that this
debate ‘‘recognized in the absence of e?ective
stockholder control, that full disclosure of infor-
mation was the only e?ective means of ensuring
that management would act in the interests of
shareholders’’. Furthermore, the views reiterated
by Berle with Means, an economist, in The Mod-
ern Corporation and Private Property (Berle &
Means, 1932) are often considered as the begin-
nings of awareness of the corporate governance
problem, since their book contains the ?rst analy-
sis of the issue in terms of separation of ownership
and control (Baums, Buxbaum, & Hopt, 1994,
Preface).
In a more recent phenomenon, researchers
started to take an interest in the di?erences of own-
ership structure, and therefore corporate gover-
nance, between di?erent countries (see, e.g., Roe,
1994 for a comparison between the USA, Ger-
many and Japan).
These normative analyses on international dif-
ferences in corporate ownership were then vali-
dated by empirical evidence from a study by La
Porta, Lopez-de-Silances, and Shleifer (1999).
Analysing the ownership structures of the 20 larg-
est publicly traded ?rms in each of the 27 richest
economies, they ?nd that the United States com-
bines relatively high ownership dispersion with
good shareholder protection, a situation shared
with other rich common-law countries, while in
other countries, the ?rms studied are typically con-
trolled by families or the State.
Based on this law and ?nance literature, the
dichotomy between stakeholder and shareholder
models is often viewed by positive accounting
researchers as a clear-cut distinction between
Anglo-American (common-law countries) and
Continental European (code-law countries) busi-
ness environments, and used to show the superior-
ity of the American accounting model over those
in other countries, and argue that capital market
driven full disclosure is the only worthwhile devel-
opment model for accounting regulators in other
countries (Ball et al., 2000; Hope, 2003; Hung,
2001).
Ball et al. (2000) were among the pioneers of this
dichotomy between stakeholder and shareholder
models in the empirical accounting literature. They
refer to ‘‘the extent of political in?uence on
accounting’’, and then go on to say (2000, p. 3):
‘‘In code-law countries, the comparatively strong
political in?uence on accounting occurs at national
and ?rm levels. Governments establish and enforce
national accounting standards, typically with rep-
resentation from major political groups such as
labour unions, banks and business associations.
At the ?rm level, politicization typically leads to a
‘stakeholder’ governance model, involving agents
for major groups contracting with the ?rm. (. . .)
Under the ‘shareholder’ governance model that is
typical of common-law countries, shareholders
alone elect members of the governing board,
[and] pay-outs are less closely linked to current-per-
iod accounting income’’.
We believe this theoretical framework o?ers a
valuable basis for analysing the change in share-
722 Y. Ding et al. / Accounting, Organizations and Society 33 (2008) 718–755
holders’ attitude toward ?rms. But we argue that
at least two important dimensions are lacking in
the extant debate. For one thing, there is no such
clear-cut distinction in governance models between
Anglo-American and Continental European busi-
ness environments. Instead, in each country, we
observe a shift, albeit at varying paces, from the
stakeholder model to the shareholder model. This
evolution is con?rmed for Germany by Schilling
(2001, p. 150) who mentions that ‘‘shareholders’
interests play a much major role’’ and by Stoney
and Winstanley (2001, p. 618) who observe that
this country is ‘‘moving towards a more market-
based (. . .) approach’’. Our analysis should be seen
as part of a debate which has generated mixed, not
to say contradictory, results. While Letza, Sun,
and Kirkbride (2004, p. 252) advocate a paradig-
matic shift from the shareholder model to the
stakeholder model, Beaver (1999) questions the
validity of the stakeholder model. In between,
there is a developing body of literature bringing
out the idea of a possible convergence between
the two models to form a ‘‘hybrid’’ model (Je?ers,
2005; Ponssard, Plihon, & Zarlowski, 2005).
Even the literature referred to above (Ball et al.,
2000; Ball, Robin, & Wu, 2003; Ball & Shivaku-
mar, 2005), which clearly separates the two models
between common-law and code-law countries,
includes some arguments supporting observation
of a general move towards a shareholder model.
In this stream of literature, the shareholder model
is associated with a high level of conservatism
proxied as a high sensitivity of earnings to any
negative return on the ?rm’s share price. In vari-
ous countries, time-series empirical evidence
proves that this sensitivity is on an upward trend.
For example, Basu (1997) documents a steady
increase over the 30 years between the 1960s and
1990s in the sensitivity of earnings to negative
returns in the US. This evidence con?rms that even
in the US, the move towards a shareholder model
has been a gradual process. In countries consid-
ered as stakeholder-dominated, empirical evidence
also con?rms an increase in this sensitivity. Ball
et al. (2000) report that it increased signi?cantly
in France and Germany in the period 1990–1995.
Giner and Rees (2001) suggest that the phenome-
non, known as asymmetric conservatism, contin-
ued to increase during the period 1996–98 in
France, Germany and the UK. Basu (2001) uses
the development of capital markets in Europe to
explain this phenomenon. All this evidence indi-
cates that the distinction between the stakeholder
model and shareholder model is not so clear-cut
after all, and the development of the shareholder
model is closely tied up with the increasingly
important role of the capital markets.
The other neglected aspect in our opinion,
rather than seeking to validate or invalidate the
superiority of the American accounting model
(serving the interests of the shareholder model),
is that the major di?erence between the stake-
holder and shareholder models is the attitude
towards long-term/short-term pro?t. As the extant
literature shows, the stakeholder and shareholder
models diverge on three major points: ownership
structure, information asymmetry and the role of
capital markets. The di?erences between the two
governance models in all these three areas produce
a preference for long-term pro?t in the stakeholder
model but for short-term pro?t in the shareholder
model, as we demonstrate below.
In practice, the stakeholder and shareholder
models re?ect two di?erent types of relationship
between shareholders and ?rms. In the former,
ownership is often highly concentrated, with
shareholders being mainly the founder families,
the state, the bank or even employees, and actively
involved in management of the company. There is
less of an information asymmetry problem for
these stakeholders: they can relatively reliably
assess the company’s future prospects. The shares
of such a company are generally not very liquid
and it is not easy to transfer ownership. The share-
holders are therefore concerned with long-term
?nancial viability and economic performance.
Long-term contractual associations between the
?rm and stakeholders form one of the main pro-
posals for stakeholding management (Letza
et al., 2004, p. 243). In the shareholder model,
ownership is dispersed and shareholders are
separate from the ?rm’s management team, with
the result that owners of the company often have
very weak or no involvement in corporate deci-
sion-making. Besides, the sizeable physical and
mental distance between the management team
Y. Ding et al. / Accounting, Organizations and Society 33 (2008) 718–755 723
and shareholders considerably increases the level
of information asymmetry. The capital market
regulations (e.g. on anti-insider trading) limit their
information access to publicly available informa-
tion only. The shareholders have less visibility over
the ?rm’s future, and are thus more focused on its
(short-term) ?nancial performance. Furthermore,
the shareholder model is closely associated with a
highly developed (and therefore very liquid) capi-
tal market. In such a context, it is simple for share-
holders to transfer their shareholding to somebody
else, and this accentuates their short-term relation-
ship with their invested companies. This situation
is con?rmed, a contrario, by certain authors who
assert that the solution for improving corporate
governance is ‘‘to provide an environment in
which shareholders (particularly large and/or insti-
tutional shareholders) and managers are encour-
aged to share long-run performance horizons’’
(Letza et al., 2004, p. 245).
The long-term/short-term objectives divide is
not new. The same authors remind their readers
that the 19th century debate on corporate gover-
nance involved two major theories: the ‘‘inherent
property rights theory’’ (also called the ‘‘?ction
theory’’), which favoured pro?t maximization,
and the ‘‘social entity theory’’ (also called the
‘‘organic theory’’) which put more emphasis on
long-term growth (Letza et al., 2004, p. 248).
We observe that the role managers play has
changed dramatically in the last 100 years. In the
late 19th and early 20th centuries, most managers
were the owners of their companies (stakeholder
model). It was thus in their interest to preserve
the company’s long-term existence, and this was
also in the interest of the creditors. But in most
major companies nowadays, managers are
employees like any others. With their stock option
plans and other incentives, they act more like
short-term investors (shareholder model).
We believe that the shift from the stakeholder
model to the shareholder model is compatible with
the ‘‘business-systems’’ literature and the ‘‘com-
parative-business-systems approach’’ (Whitley,
1998, 1999a, 1999b). Business systems are con-
ceived as distinctive patterns of economic organi-
zation that vary in their degree and mode of
authoritative coordination of economic activities,
and in the organization of, and interconnections
between, owners, managers, experts, and other
employees (Whitley, 1999b, p. 33). Nation states
often develop distinctive business systems and
Whitley discusses the importance of state bound-
aries (1999b, pp. 44–45). However, while business
systems are related to countries, they evolve over
time, and Whitley (1999b, pp. 182–208) provides
evidence of changes in business systems in East
Asian capitalist countries (Japan, South Korea,
Taiwan). A few years later, Whitley (2005, p.
223) adds another idea: ‘‘the growing internation-
alization of investment and managerial coordina-
tion may weaken the national speci?city of
business systems’’. All these arguments, based on
the changes in dominant forms of economic orga-
nizations in market economies, can be transposed
to the countries included in our scope. Although
Whitley (2005, p. 223) limits his thought by refer-
ring to the ‘‘weakly institutionalized nature of the
international business environment at the global
level’’, we will demonstrate in Section ‘‘The four
historical phases of accounting for goodwill’’ that
as far as ?nancial accounting is concerned, the
international environment has had a major in?u-
ence on accounting for goodwill. In conclusion,
the concept of change in business systems rein-
forces the idea of evolution from one corporate
governance model (the stakeholder model, in our
study) to another (the shareholder model).
Balance sheet theory and goodwill
Continental European balance sheet theories
?rst appeared in the 19th century, in a context
marked by a clash of interests between creditors
and shareholders. From the introduction of the
French commercial code (Code de commerce) in
1807, and publication of comments on the code
(e.g., Delaporte, 1808, p. 122; Molinier, 1846, p.
194) until around 1870–1890, creditors and their
defenders in France and Germany successfully
imposed the ‘‘liquidation market value’’ as the
basis for accounting legislation and court rulings
(Richard, 2005a, 2005c). But towards 1870 in Ger-
many, certain lawyers defending the interests of
shareholders in large companies, particularly rail-
way companies, led a revolt against the accounting
724 Y. Ding et al. / Accounting, Organizations and Society 33 (2008) 718–755
concept of the Vermo¨ gensbilanz, or ‘‘liquidation
balance sheet’’. Based on the going concern con-
cept, they proposed a new type of balance sheet,
the Betriebsbilanz or ‘‘going concern balance
sheet’’ considered more capable of generating reg-
ular dividend distribution, where ?xed assets were
stated at (amortized) cost (Richard, 2005a, 2005c).
Von Strombeck (1878, p. 15), for example, argued
that ‘‘the distribution of dividends should be based
solely on going concern balance sheets, not liqui-
dation balance sheets, so as to avoid ?uctuations
in value’’.
A few years later, although he was also against
liquidation balance sheets and in favour of the
going concern principle, another German lawyer,
Simon (1886, p. 161), published what amounts to
a work of accounting theory with a new concept
of the balance sheet, based on statement of ?xed
assets at their subjective value in use (Gebrauchsw-
ert) for a given businessman, rather than at cost as
Von Strombeck recommended.
It can thus be considered that the three-faceted
continental European balance sheet theories and
the con?icting concepts of the balance sheet (liqui-
dation value, cost ‘‘value’’ and value in use)
emerged as early as 1886 (Richard, 2005b). This
theoretical framework was then advanced in Ger-
many by Schmalenbach (1919), who introduced a
new vocabulary, classifying the at-cost balance
sheet as ‘‘dynamic’’, as opposed to ‘‘static’’ liqui-
dation value or value in use balance sheets.
This two-way classi?cation and vocabulary are
still in use in Germany, particularly in the work
of Moxter (1984). In this paper, we use the repre-
sentation by Richard (1996), who opts for a three-
way classi?cation: the word ‘‘static’’ is reserved for
liquidation value balance sheets. Value in use bal-
ance sheets, which are very di?erent from ‘‘static’’
liquidation balance sheets, are given a speci?c
adjective, ‘‘actuarial’’.
Continental European balance sheet theories
were an important source of inspiration for Hat-
?eld, the ?rst great American accounting theorist,
who was well-versed in German culture (Richard,
2005b; Ze?, 2000). Afterwards, with the coming
of Paton’s era (Paton & Littleton, 1940; Paton,
1962; Paton & Stevenson, 1922), ‘‘Anglo-Saxon’’
authors lost sight of these theories. But for the
purpose of this article, they are particularly inter-
esting, since due to their historical origins (the
creditor-shareholder con?ict) they provide a sys-
tematic link between the typology and conception
of balance sheets and the evolution of the sociolog-
ical and political context, and relate to the stake-
holder/shareholder question that is the backdrop
to this study.
Fig. 1 summarizes the di?erent balance sheet
concepts, highlighting the terminology used by
the di?erent authors.
Schematically, the history of goodwill since the
1880s can be divided into four phases using a
typology inspired by the continental European
balance sheet theories discussed above (Richard,
2005b):
(1) The pure static phase ( ) (Richard, 1996, p.
31, 33): The term static (from Latin ‘‘stare’’,
to stop) is used to describe an accounting
theory which assumes that the balance sheet,
for the sake of creditor protection, shows liq-
uidation values (the resale value in a liquida-
tion process). It implies that goodwill is a
?ctitious 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 good-
will, applying a write-o? against equity.
(3) The dynamic phase ( ) (Richard, 1996, pp.
51, 61–62). Here, the underlying assumption
is no longer the liquidation of the company
but the going concern (dynamic) approach,
although goodwill is still assumed to have a
?nite life. This implies recognition of an
asset, with application of amortization over
a long period.
(4) The actuarial phase ( ): this corresponds to
the going concern assumption but without
the idea that goodwill can ‘‘die’’, leading to
recognition of an asset, with impairment test-
ing based on discounted (actuarial) cash
?ows.
1
1
We associate discounted cash ?ows with the term ‘‘actuar-
ial’’ in the same way as Bogle (1889, p. 693) and Guthrie (1883,
p. 6).
Y. Ding et al. / Accounting, Organizations and Society 33 (2008) 718–755 725
Stakeholder/shareholder models applied to goodwill
Stakeholder model
In a stakeholder model, shareholders are mainly
blockholders such as families, state, banks or
employees. Their presence is often a long-term
commitment, and exits are relatively rare. In this
situation, their main concern is protection and
the durability of the corporate assets, in line with
creditors of the ?rm. They are not therefore in
favour of recording goodwill as an asset, prefer-
ring to have it eliminated as soon as possible
(phase of the balance sheet theory). Walker sums
up their position very succinctly (1938a, p. 174).
The creditors, particularly banks, were su?-
ciently in?uential in the past to impose the write-
o? against equity solution (phase ). The opinion
of some actors in the early part of the 20th century
was expressed by Mac Kinsey and Meech (1923, p.
538): ‘‘Bankers and businessmen generally prefer a
balance sheet presenting only tangible assets to
one loaded with goodwill and other intangible val-
ues . . . in general, accumulated surplus should bear
its share’’. This opinion was echoed by Esquerre´
(1927, p. 41).
Shareholder model
The situation in the shareholder model is quite
di?erent. ‘‘Professional’’ shareholders or ‘‘rentier
investors’’ (to use an expression of Hannah
(1983, p. 57)), unlike family–owner shareholders,
are generally short-term oriented and expect
immediate, maximum pro?ts. Many accounting
historians have shown how, very often, creditors
and family–owners share an interest in conserva-
tive accounting (see notably Edwards, 1989; Lem-
Liquidation
balance sheet =>
Market value
Going concern
balance sheet
=> Value at cost
Actuarial balance
sheet
=> Value in use
Von Strombeck
(1878)
Simon (1886)
Schmalenbach
(1919), Moxter
(1984)
“Static” balance
sheet
“Dynamic”
balance sheet
Richard (1996) “Static” balance
sheet
“Dynamic”
balance sheet
“Actuarial”
balance sheet
“Pure static”
balance sheet
“Weakened static”
balance sheet
Concepts
Authors or promoters of the terminology
Delaporte (1808)
Molinier (1846)
This
paper
Fig. 1. Balance sheet theories – terminology.
726 Y. Ding et al. / Accounting, Organizations and Society 33 (2008) 718–755
archand, 1993, pp. 529–581). The di?erence
between the interests of professional shareholders
and other stakeholders goes a long way back, as
exempli?ed by Best’s (1885) remark: ‘‘shareholders
are very apt to take one point of view and creditors
and the outside public another’’. In theory, the dis-
appearance of the old conservative attitude
towards goodwill should be associated with a rise
in the in?uence of professional shareholders.
Total separation between ownership and man-
agement tends to work in favour of a non-amorti-
zation approach (phase ), after the amortization
approach (phase ), which could be seen as a com-
promise. More prosaically, it could be said that
shareholders will not stand for immediate or rapid
charging of goodwill against income. At the end of
the 19th century, a good many authors, including
supporters of immediate expensing/amortization,
were already aware that shareholders could ?nd
themselves deprived of dividends due to drastic
amortization of goodwill (see Guthrie, 1898, p.
429; Leake, 1914, p. 88; Matheson, 1884; More,
1891, p. 287).
Much more recently, the FASB itself (2001b, p.
3) acknowledged that ‘‘analysts and other users of
?nancial statements, as well as company manage-
ments, noted that intangible assets are an increas-
ingly important economic resource for many
entities (. . .) and that ?nancial statement users also
indicated that they did not regard goodwill amor-
tization expense as being useful information in
analysing investments’’. It went on (2001b, p. 5)
to reiterate the importance of ‘‘?nancial statement
users’’, saying they ‘‘will be better able to under-
stand the investments made in those [goodwill
and intangible] assets and the subsequent perfor-
mance of those investments’’ (our emphasis). The
accent is explicitly on performance measurement,
and ‘‘ability to assess future pro?tability and cash
?ows’’ (FASB, 2001b, p. 5).
The in?uence of the ?nancial markets is visible in
the same FASB Statement (2001b, p. 5), which con-
Stakeholder
influence
Shareholder
influence
Delayed
negative impact
on profit/equity
Non-capitalization
(expensing, or
amortization over a
short period)
Phase
Capitalization
without amortization
(but impairment
testing)
Phase
Capitalization with
amortization (over a
long period)
Phase
Non-capitalization
with write-off
against equity
Phase
Immediate
negative impact
on profit/equity
1
2
3
4
Fig. 2. Summary: Stakeholder/shareholder models, balance sheet theory and accounting for goodwill.
Y. Ding et al. / Accounting, Organizations and Society 33 (2008) 718–755 727
cludes that ‘‘amortization of goodwill was not con-
sistent with the concept of representational faithful-
ness, as discussed in FASBConcepts Statement No.
2’’ (FASB, 1980). It may sound surprising that it
took more than 20 years to realize this inconsis-
tency, but the FASB does explicitly link the reform
to ‘‘the increase in merger and acquisition activity
that brought greater attention to the fact that two
transactions that are economically similar may be
accounted for by di?erent methods that produce
dramatically di?erent ?nancial statement results’’
[the pooling-of-interests method and purchase
method] (FASB, 2001b, Appendix 1, p. 5).
In our opinion, the capital markets’ in?uence,
and therefore the importance of the shareholder
model, is also re?ected in the notion of interna-
tional pressure, or the desire for international com-
parability which is sometimes mentioned (Bryer,
1995, p. 305). The growing role of the capital mar-
kets is also due to the ever-increasing signi?cance
of goodwill in corporate accounts (Higson, 1998).
Fig. 2 summarizes the results of our analysis on
the relationship between the shift from a stake-
holder model to a shareholder model and account-
ing regulations for goodwill.
Fig. 2 shows that the shift from the stakeholder
model to a shareholder model (from long-term to
short-term pro?t orientation) is progressive, and
corresponds to the four phases of the balance sheet
theory described above which, in turn, can be
related to goodwill treatment.
The four historical phases of accounting for goodwill
The move from the stakeholder model to the
shareholder model resulted in changes in the regu-
lations a?ecting goodwill treatment over the per-
iod examined. However, the four countries
studied went through the same phases but at di?er-
ent times.
Fig. 3 summarizes the four phases in the evolu-
tion of accounting for goodwill in the four coun-
tries studied.
We do not include the IASC/IASB as a separate
entity in our detailed analysis as the in?uence of its
standard-setting on other countries has only been
seen recently, i.e. in the late nineties with the trend
for reducing the number of options (Walton, Hal-
ler, & Ra?ournier, 2003, p. 13).
2
Phase 1: The static phase (non-recognition phase)
Great Britain (1880–1897)
As emphasized by Dicksee and Tillyard (1920,
p. 70), right up until 1900 the law and court rulings
played a practically non-existent role in the treat-
ment of goodwill in Great Britain. It is thus impor-
tant to ?nd out what practices most British
accountants recommended.
In this phase, running from 1880 to about 1900,
the dominant doctrine considered that goodwill
was not a true asset, and should be immediately,
or at least rapidly, expensed. The best proof of
the widespread refusal to consider goodwill as an
asset is in the writings of Gundry, one of the few
authors in favour of seeing it as a ‘‘valuable asset’’
(1902, p. 663). Gundry, quoting Dicksee (1897)
complains of ‘‘the general denouncement and dep-
recation of the term as an asset’’ (1902, p. 663).
The argument that goodwill would have no
value in a bankruptcy situation was taken up by
lawyers, such as Roby (1892, p. 293) and some
accountants, including Knox (in Guthrie, 1898,
p. 430), Stacey (1888, p. 605) and the author of a
leading article in Time in 1905 (quoted by Dicksee
& Tillyard, 1920, p. 99). It is thus hardly surprising
that a large number of accountants were in favour
of immediately or rapidly writing o? goodwill
against pro?ts (Bourne, 1888, p. 604; Matheson,
1884; More, 1891, p. 286; Roby, 1892, p. 293; see
also Knox in Guthrie, 1898, p. 430).
2
For the sake of completeness, we will simply observe that
the international accounting standard ‘‘Accounting for business
combinations’’ (IASC, 1983) was adopted for the ?rst time in
1983. Under paragraphs 39–42, several options were possible:
(1) recognition as an asset and amortization over the useful life;
(2) immediate reduction of earnings or (3) write-o? against
equity. These solutions correspond to our ?rst three phases
(static, weakened static and dynamic). This standard was
revised in 1993, and the ?rst two options were removed:
goodwill had to be amortized over its useful life. This useful life
was not to exceed 5 years unless a longer period, not exceeding
20 years, could be justi?ed (IASC, 1993, Sections 40 & 42). Only
IFRS 3 (IASB, 2004b), which is mentioned in the body of the
article, had any real in?uence on three of our studied countries
(i.e. Great Britain, France and Germany).
728 Y. Ding et al. / Accounting, Organizations and Society 33 (2008) 718–755
Our conclusion from all this information is that
the immediate expensing or rapid amortization
approach, against current pro?ts, was the stan-
dard practice up until 1900–1905. Globally speak-
ing, this prudent accounting approach comes as
no surprise: it is in line with the social and eco-
nomic context of the period (Hoppit, 1987, p.
16; Parker, 1965, p. 160) where the stakeholder
model was clearly the norm for corporate
governance.
Germany
Pure
static phase
Dynamic
phase
Weakened
static
phase
1880
1900
1917
1970
1982
1985
1990
2001
Actuarial
phase
2005
Great Britain
US
France
2000
1
2
3 4
Fig. 3. Summary: The four phases of accounting treatment of goodwill.
Y. Ding et al. / Accounting, Organizations and Society 33 (2008) 718–755 729
In contrast to the German situation (see below),
there was strong opposition in Great Britain to the
dominant purely static doctrine, ranging over sev-
eral distinct views. For simplicity’s sake, we iden-
tify the two main views.
The ?rst, more widely held view concerned pro-
ponents of the dynamic approach (which corre-
sponds to our phase ) (see Guthrie, 1898, p.
429). The second, and at the time the only credible
alternative to the purely static approach, rallied
authors who (also) proposed that goodwill should
disappear from the accounts immediately, but by
charging to equity (phase ). This was the position
of writers such as Dicksee (1897), whose later
in?uence was to be fundamental (see below).
United States (1880–1897)
Throughout this period, the US economy was
also dominated by the stakeholder model. Good-
will was not therefore considered as a true asset
and was theoretically to be deducted from reve-
nues. There was no regulation during this phase,
but British writings and practices were very in?uen-
tial (Hughes, 1982, p. 24), and the situation appears
to have been the same as in Great Britain. Symp-
tomatically, the authors of one study of changes
in the treatment of goodwill took their opinions
from Harris (1884, p. 11) and assert that prior to
the late 19th century, ‘‘accountants appeared in
substantial agreement that amounts expended for
goodwill should not be carried very long in the bal-
ance sheet’’ (Catlett & Olson, 1968, p. 38).
Knight (1908, p. 197) speaks of goodwill as an
‘‘uncertain value’’ and deems that ‘‘the best course
is to dispose of such an account through a charge
to depreciation’’, with writing o? ‘‘encouraged’’.
Germany (1880–1985)
Germany
3
was the country with by far the lon-
gest initial phase: from 1880 to 1985. Prior to 1931,
no law made any reference to treatment of good-
will, leaving only doctrine and court rulings as
our sources. The German lawmakers of the time,
under the in?uence of Napoleonic lawyers,
adopted a static view of accounting: no item could
be recognized as an asset unless it would have an
individual market value in the event the company
ceased to exist, i.e. went bankrupt. As a result of
this doctrine most intangibles, particularly good-
will, that were not separable from the company
and had no individual market value, had to be
expensed immediately. This was to be the domi-
nant practice for a great many years.
The only major voices raised in favour of recog-
nizing acquired goodwill came from early support-
ers of the dynamic doctrine such as Simon and
Fischer (Greve, 1933, p. 22). Only a few authors
dared to propose recognition of goodwill followed
by amortization over more than 5 years (Take,
1939, p. 116). Among the main proponents of this
approach were Schmalenbach (1949), Mu¨ ller
(1915), Schreier (1928), Stern (1907), and Schmidt
(1927) (on these authors, see Greve, 1933, p. 32;
Take, 1939, pp. 111–112), all of whom were in
favour of long-term, systematic amortization.
The ?rst German law concerning goodwill was
an emergency law of July 19, 1931. It added a
new article to the Commercial Code (article 261)
allowing acquired goodwill to be recognized as
such only on condition it was then amortized by
‘‘appropriate annual amortization charges’’.
According to Greve (1933, p. 35) and Take
(1939, p. 116), this law simply gave formal expres-
sion to the dominant doctrine of the time.
The measures introduced in 1931 were included
without amendment in the law (AktG) of 1937
(article 133, paragraph 5), and then almost without
amendment in the law (AktG) of 1965 (article 153,
paragraph 5). The only noteworthy di?erence is
that in 1965, the law stipulated that the systematic
amortization against goodwill entered as an asset
must be at least one-?fth annually. This remained
applicable until 1985.
This exceptionally long static phase in Germany
is consistent with the country’s strong stakeholder
model. For example, Roe (1994, p. 1936) docu-
mented that ‘‘CEOs at many large German com-
panies face a small group of institutional voting
3
Although the country ‘‘Germany’’ did not exist as such at
the beginning of the period under study, the following
discussions apply to Prussia and the other German states,
because after the Nu¨ rnberg conference (1857), a commercial
code common to all German states (‘‘Allgemeines Deutsches
Handelsgesetzbuch’’ – ADHGB) was established as early as
1861 (Oberbrinkmann, 1990, p. 33).
730 Y. Ding et al. / Accounting, Organizations and Society 33 (2008) 718–755
blocks that controls nearly half of the stock
voted’’.
France (1880–1917)
Re?ecting the decisive in?uence of family own-
ers and creditors (stakeholder model), the ?rst
phase in France was dominated by the purely sta-
tic approach in both doctrine and case law: good-
will was not considered a true asset and was to be
expensed immediately, or at the very least amor-
tized rapidly.
In the 1880s, authors such as Didier (1885) with
his ‘‘strict’’ balance sheet, Courcelle-Seneuil (1872)
and Vavasseur (1868), who stressed the di?culty
of realizing ?xed assets (in Verley, 1906, p. 121),
recommended that assets, including goodwill,
should be carried at liquidation value. To this
way of thinking, a ‘‘good’’ asset was one with
totally amortized goodwill.
In the 1900s, most authors such as Kopf (1904,
p. 27), Verley (1906, p. 39), Didier (1885) and Ami-
aud (1920, p. 6) also insisted that acquired good-
will was not a real asset. While they accepted
recognition of this ‘‘?ctitious’’ asset, rapid amorti-
zation (generally total amortization within less
than 5 years) or a similar solution was required.
The dynamic approach of long-term amortiza-
tion was only supported by Magnin (1912), whose
writings, inspired by the German dynamic school,
were ?ercely criticized by most other authors. The
only other real resistance to the static view came
from French followers of the famous German law-
yer Simon, principally Duplessis (1903) and above
all Charpentier (1906), who were in favour of
goodwill remaining in the balance sheet at its
acquisition value, unless a fall in its ‘‘useful’’ value
could be proved. This is in e?ect a conservative
version of the actuarial approach.
Phase 2: the weakened static phase (excluding
France)
This phase is identi?able in all the countries
except France. Unlike Great Britain and the US
where accounting law is independent of tax law,
from 1917 the situation in France was dominated
by tax concerns, which prevented the kind of
change seen elsewhere. While the tax rule in the
other countries was similar to the French rule of
recognition without amortization, its in?uence
was not as great as in France. France will therefore
be examined in a separate section ‘‘Phase 2 in
France: the ?scal approach (1917–1982)’’. France
was to return to a ‘‘normal’’ situation as domestic
tax in?uence declined and international in?uence
increased.
Great Britain (1897–1990)
During this phase, since their immediate nega-
tive impacts on income harm dividend distribu-
tion, the purely static approaches (immediate
expensing or rapid amortization against the year’s
pro?ts) increasingly fell from favour, while a
weakened static approach involving charging
goodwill to equity became more popular. The
demise of the immediate expensing or rapid amor-
tization practice is visible from the work of in?u-
ential authors of the ?rst half of the 20th
century: Dicksee (1897), Garke and Fells (1922)
and Lancaster (1927) all reject the practice of
quick ‘‘writing down’’ against income. The domi-
nant solution was to make goodwill disappear by
charging it to equity, a practice that combines
the basic static approach – goodwill is not an asset
– with the possibility of dividend distribution,
based on current pro?t. The shareholder model
was growing in importance.
The idea of charging goodwill to equity came
from the leading author for the second half of
the 19th century, Dicksee (1897). This ‘‘king’’ of
British accounting was caught between two con-
?icting views:
– in?uenced by the static doctrine of the time, he
accepted that goodwill is an asset of ‘‘arbitrary’’
value (1897, p. 45) that can be considered equiv-
alent in nature to ‘‘Establishment expenses’’
(1897, p. 46) and must be treated with ‘‘the
greatest caution’’ (1897, p. 46). He arrived at
the conclusion that this asset should be elimi-
nated ‘‘with all due speed’’ (1897, pp. 45–46);
– on the other hand, he also had shareholder’s
interests in mind, and believed that goodwill
‘‘should not be written o? out of pro?ts’’
(1897, p. 46) because that is equivalent to creat-
ing ‘‘a secret reserve’’ (1897, p. 47).
Y. Ding et al. / Accounting, Organizations and Society 33 (2008) 718–755 731
Failing to ?nd an optimum solution, Dicksee
(1897), in agreement with Tillyard (1920, p. 106),
appears to have ?nally accepted that acquired
goodwill should be charged to reserves, particu-
larly if the goodwill was arti?cially in?ated. As in
the previous period, many authors such as Hamil-
ton (1914, p. 218), Lancaster (1927, p. 146) and
Garke and Fells (1922) were drawn to this view
for practical reasons.
This weakened static solution remained the
standard approach in the UK until the end of
the 1980s. Apart from reference to the in?uence
of the dominant doctrine, one important fact sup-
ports this statement: despite an attempt to change
the situation (a discussion paper dated 1980 with
a proposal for capitalization and systematic amor-
tization), at no time were the British lawmakers in
a position to impose a solution contrary to the
dominant practice (Paterson, 2002b). Further-
more, SSAP 22 (ASC, 1984, revised in 1989) still
allowed goodwill to be written o? immediately
against reserves while o?ering an alternative
treatment consisting of capitalization and amorti-
zation against future pro?ts over its ‘‘useful eco-
nomic life’’. The ?rst treatment was adopted
almost universally (Arnold et al., 1994; Peasnell,
1996).
In our opinion, the weakened static solution is
e?ectively a ‘‘convenient’’ variant of the purely
static approach. Its aim is not to make goodwill
an asset, but to make it disappear ‘‘softly,
softly’’. Our view appears to correspond to the
position defended in Great Britain (Holgate,
1990, p. 11).
US (1897–1970)
As in Great Britain, the static approach still
dominated in the United States during this period,
the basic view being that goodwill was not a real
asset and should be made to disappear as soon
as possible. However, rather than being charged
to expenses, goodwill was increasingly charged
against equity, and so the weakened static
approach began to predominate as it did in Eng-
land. On the theoretical aspect, Dicksee’s ideas
were widely echoed in the United States, where
many authors favoured the solution of an immedi-
ate write-o? against retained earnings or capital
surplus (Kester, 1922, p. 419; Lincoln, 1923; Mac
Kinsey & Meech, 1923, p. 538).
This philosophy was also re?ected in the ?rst
US regulations. In 1917, a memorandum entitled
‘‘Uniform Accounting’’ issued by the American
Institute of Accountants (predecessor to the Amer-
ican Institute of Certi?ed Public Accountants) was
accepted by the Federal Trade Commission and
Federal Reserve Board, for application by compa-
nies wishing to obtain a loan. It recommends that
goodwill should be ‘‘shown as a deduction from
net worth’’ (AIA, 1917). While this treatment
was only compulsory for ?nancial statements pro-
duced for the purposes of a loan, it still reveals the
state of mind at the time.
There was also an increasing trend towards rec-
ommending recording goodwill at cost, followed
by systematic amortization over its useful life or
the period referred to for discounting to present
value (Gilman, 1916, p. 195; Hat?eld, 1918, p.
117; Hat?eld, 1927; Paton & Littleton, 1940, p.
92; Paton & Stevenson, 1922, p. 531; Yang, 1927,
p. 196). Others were in favour of recognition at
cost with no systematic amortization (Bliss, 1924,
p. 350; Dickinson, 1917, pp. 79–80; Esquerre´,
1927, p. 130; Freeman, 1921, p. 263).
A signi?cant event of this period was the serious
1929 economic crisis in American industry, which
had several consequences in terms of treatment
of goodwill. Its main impact was to reinforce the
positions of those who saw goodwill as an unsta-
ble, if not undesirable, item (Walker, 1938b, p.
259).
Germany (1985–2000)
The main di?culty in analysis of this period lies
in the fact that Germany introduced all European
accounting directives into its national regulations
at the same time, and reformed regulations gov-
erning both individual and consolidated accounts,
with di?erent solutions for goodwill. This change
also coincided with the development of the Ger-
man capital market.
Individual accounts. The German law of 1985,
which incorporated the fourth EU directive into
German regulations, includes a paragraph 255
with three sections on the treatment of goodwill
732 Y. Ding et al. / Accounting, Organizations and Society 33 (2008) 718–755
in individual ?nancial statements: (1) Section 1:
goodwill may be capitalized if it has been acquired;
(2) Section 2: if goodwill is capitalized, it must be
amortized each subsequent year by at least 25%;
(3) Section 3: the amortization may, however,
‘‘also be distributed systematically over the years
which are likely to bene?t’’ (see Ballwieser, 1996).
A ?rst look at this rather indecisive text can
lead to the following conclusions: the law does
not impose treatment of goodwill as an asset,
and allows (as before) immediate expensing of
the corresponding disbursements. It can be even
asserted that the ‘‘expense solution’’ remains the
normal solution (Duhr, 2003; Ku¨ ting, 1997, p.
49), as Section 2 requires on principle that if the
goodwill is capitalized, rapid amortization must
be applied over a period of less than 5 years. This
basic solution is explained, according to the doc-
trine, by the traditional conservatism principle
(Duhr, 2003, p. 973; Ellrott, 2003, margin note
245; Walz, 1999, margin note 82).
But Section 3 sheds some doubt on the ‘‘sound-
ness’’ of the basic solution: for the ?rst time in the
history of Germany, an o?cial text allows treat-
ment of goodwill according to the dynamic
approach, with capitalization and amortization
over its full period of use.
Unsurprisingly given this ambiguity, which some
specialists considered totally illogical (Busse von
Colbe & Ordelheide, 1993, p. 234; Ku¨ ting, 2000,
p. 102), the German doctrine is hesitant as to the
nature of goodwill in individual accounts. It seems
that the majority of German authors (see namely
Baetge, Kirsch, & Thiele, 2002, p. 262; Busse von
Colbe, 1986, p. 87; Fo¨ rschle, 1995, margin note 7;
Fo¨ rschle & Kropp, 1986, p. 155; Ku¨ ting, 1997, p.
461; Ludz, 1997, p. 70; So¨ ?ng, 1988, p. 599; Weber
& Zu¨ ndorf, 1989, p. 334) consider that neither the
text of the law, nor the nature of goodwill (which
is neither individually resalable nor individually
valuable, and represents anticipated bene?ts) can
confer on goodwill the status of a true asset. For a
good number of these authors, goodwill, if capital-
ized, is only a ‘‘balance sheet-help’’ (‘‘Bila-
nzierungshilfe’’, an item which can in exceptional
cases be recorded in the balance sheet, although it
is not an asset), i.e. (in our own interpretation) a ?c-
titious ‘‘asset’’ to be got rid of as rapidly as possible.
It can be concluded at this stage that although,
from a regulation standpoint, the dynamic solu-
tion was beginning to break through (an undeni-
ably new development in the German context),
the basic solution, as con?rmed by the predomi-
nant doctrine, remained the classic static concep-
tion. But this view must be cross-checked against
the practices allowed for consolidated accounts.
Consolidated accounts. The treatment of goodwill
in consolidated accounts is codi?ed by article
309-1 of the German Commercial Code. This arti-
cle displays two fundamental oddities in compari-
son with its counterpart for individual accounts.
The ?rst, which necessarily derives from the
European text, is that, as a matter of principle,
goodwill must be (not may be) capitalized (article
309-1, Section 1). The di?erent wording initially
appears to indicate a di?erent treatment compared
to individual accounts. But there is a second odd-
ity: the fact that the German legislator has used the
?exibility of article 30 Section 2 of the seventh EC
directive, which allows member states to authorize
companies to write-o? goodwill against equity.
Many German authors who recommend unifying
the rules between corporate and consolidated
accounts, notably Busse von Colbe and Ordelheide
(1993, p. 233) and Ku¨ ting (1997, p. 455), refer to
Niehus (1986, p. 239) in underlining that this ?ex-
ibility results from a request by Great Britain, and
constitutes an ‘‘error’’. Whether or not this is true,
this ‘‘error’’ has been legalized by the German leg-
islator, who was under no obligation to do so.
Article 309-1 paragraph 3 allows German groups
to write o? goodwill against consolidated retained
earnings (but unlike the seventh directive, without
specifying that the write-o? must be immediate).
To complete the scene, the German legislator has
integrated other solutions allowed for individual
accounts into the regulations for consolidated
accounts: rapid amortization over a maximum of
5 years (paragraph 1) and amortization over the
useful life (paragraph 2).
In terms of actual practices, the studies
described by Busse von Colbe and Ordelheide
(1993, p. 234, note 31) and Ku¨ ting (2000) show
that there was a real craze among German groups
for the weakened static solution.
Y. Ding et al. / Accounting, Organizations and Society 33 (2008) 718–755 733
All this evidence makes it reasonable to state
that due to the decisive importance of consoli-
dated accounts, the 1985–2000 period in Germany
was mainly dominated by the weakened static
solution.
Phase 2 in France: the ?scal approach (1917–1982)
From 1917, the tax administration began to
intervene on the French accounting scene. Its the-
ory of how goodwill should be treated was to have
great in?uence on commercial doctrine and regula-
tions. This phenomenon was unique in the four
countries studied and lasted more than 60 years,
from 1917 to 1982.
The new doctrine of the French tax administration
for individual accounts
To begin with, when the ?rst major French law
on income taxes (the law of July 31, 1917) was
enacted, the tax view was not openly hostile to
the static approach. Article 4 of the law simply sta-
ted that taxable pro?t was the amount after deduc-
tion of all expenses, including ‘‘amortization
generally accepted in the practices of each type
of industry’’. But subsequently, no doubt for bud-
getary reasons (Prospert, 1934, p. 71), the tax
administration, in an instruction of March 30,
1918, refused all systematic (and a fortiori rapid)
amortization of goodwill (Brie`re, 1934, p. 181).
Despite some changes between 1918 and 1928,
the French tax administration’s position remained
almost constantly as follows practically from 1928
to the modern day: (1) goodwill is an asset (but
start-up costs are not); (2) goodwill cannot be sys-
tematically amortized; (3) goodwill can be reduced
in exceptional circumstances.
The in?uence of the tax administration’s position on
French accounting regulations
Its in?uence was considerable. As early as 1944,
Dalsace (1944, p. 142) was complaining about peo-
ple ‘‘giving in’’ to the tax administration’s ideas
and pointed out that ‘‘all ?nancial or ?scal consid-
erations should be independent of asset valuation
and amortization’’. A few years later, an essay
was published entitled ‘‘the hijacking of account-
ing by taxation’’ (Rives, 1962).
As regards goodwill, this hijacking was obvious
from 1947. From the ?rst French General
Accounting Plan (Plan comptable ge´ ne´ ral) (CNC,
1947, pp. 79–81) it is clear that tax (i.e. actuarial)
concerns had got the better of static and dynamic
approaches: there is no (systematic) amortization
account for goodwill, merely a provision account
(but no indication of how it should be used). The
situation was unchanged 10 years later when the
1957 General Accounting Plan was issued (Poujol,
1965, p. 96), and continued until 1982.
In order to guarantee tax income, the French
taxation system acted exactly like a short-term-ori-
ented investor, obliging ?rms to maximize their
current income to the detriment of future earnings.
France’s acceptance of the tax administration’s
position disallowing systematic amortization of
goodwill should not be taken to mean that France
was more ‘‘advanced’’ than other countries; on the
contrary, it is the sign of a delay in its development
towards stock market capitalism.
The case of consolidated accounts
The above remarks concerned individual
accounts. In the case of consolidated accounts,
the situation in France also displayed a peculiar-
ity compared to the other countries. Up to 1985,
no strict obligation to establish consolidated
accounts applied to French groups. During the
whole period 1917–1982 the only French regula-
tion that groups wishing to establish consolidated
accounts could refer to was a CNC (Conseil
National de la Comptabilite´ – National Accoun-
tancy Council) report published in 1968 (CNC,
1968) and revised in 1978, but with no legal
enforceability, which proposed that goodwill (at
that time called ‘‘Prime d’acquisition des titres de
participation’’ – ‘‘Acquisition premium on long-
term investments’’) should be maintained without
change in the consolidated balance sheet (with no
systematic amortization), ‘‘unless special circum-
stances justify reducing its value by constitution
of a provision for impairment’’ (CNC, 1978, Sec-
tion 4102a). This solution visibly remained in line
with the tax and accounting doctrines prevailing
at that time for individual accounts, but as it
had no legal value, groups were not obliged to
follow this framework.
734 Y. Ding et al. / Accounting, Organizations and Society 33 (2008) 718–755
Some studies, however, seem to show that even
in this period, a few French groups were beginning
to follow the lead of the most ‘‘modern’’ American
rules. For instance, Pe´chiney amortized its good-
will over 10 years in 1969 and 40 years in 1973
(Bensadon, 2002, p. 58). It was thus a time of con-
?ict between what French regulations allowed and
what French groups wanted.
Phase 3: the dynamic phase
United States: the dynamic position comes out on
top (1970–2001)
In the period 1940–1970, three main phenom-
ena were visible on the American scene: the doc-
trine and practice of writing o? goodwill was in
decline, the dynamic doctrine and practice began
to take over, and there was still some resistance
to doctrines and practices that wanted goodwill
to have no impact on pro?t.
The decline of the write-o?. In the doctrine, this
decline is clear, at least from around 1945 to
1970. The leading author of accounting literature
at the time was the renowned Paton (1962), who
like other authors such as Walker (1953), Kripke
(1961), Hylton (1964, 1966) and Wol? (1967, p.
258), was in favour of dynamic approaches and
against goodwill write-o?s. His opponents were
only minor authors, often practitioners such as
Catlett and Olson (1968), and Spacek (1973).
The decline is just as obvious in the regulations
(AAA, 1948, p. 340; AIA, 1953, pp. 39–40). The
AIA’s basic position was that acquired goodwill
should be systematically amortized by reduction
of current income. But write-o?s were still allowed.
A decisive attack on this stand came in 1966 in the
form of APB Opinion No. 9 concerning prior-per-
iod adjustments. This argued that write-o?s should
in principle be charged against current income.
The decline of the write-o? was equally strong in
practice (Hughes, 1982, p. 156). The reasons for the
declining popularity of the practice are not clear
(see Kripke, 1961, p. 1029, note 3; Spacek, 1973),
but apparently concern the aim to avoid (1) elimi-
nation of reserves that were useful for dividend dis-
tribution; (2) a sudden impact on reserves and (3)
reduction of the ?nancial surface of the ?rm.
The rise to dominance of the dynamic approach. The
move towards the dynamic approach happened
slowly. It probably began in the 1930s, a period
of serious economic depression when businesses
tried to reassure shareholders by providing a
‘‘smoothed’’ (to apply a modern term) presenta-
tion of income. But in a context of economic crisis,
with conservative approaches still very strong at
the time (Kripke, 1961, p. 1032), it was too early
for full application of this ‘‘new’’ doctrine, at least
for goodwill. It was only in the 1960s and 1970s
that the dynamic doctrine came to dominate in
treatment of goodwill, at a time when stock mar-
kets were sluggish, demonstrating that creditor
protection was no longer a concern of the state
(decline of the stakeholder model).
Although it was not absolute, this domination
is clear in both regulations and practices. In terms
of regulations, the main o?cial document re?ect-
ing the domination of dynamic practices is APB
Opinion No. 17 of 1970, which stipulates that
goodwill must be ‘‘amortized by systematic
expenses over a certain period’’. This e?ectively
cancelled out the options left open by ARB 43
chapter 5, which had favoured write-o?s.
Continued opposition. It is always di?cult to satisfy
all companies, as they all operate in di?erent con-
ditions. APB 17 was adopted by 13 votes for over 5
against, indicating signi?cant ‘‘resistance’’ to the
dynamic approaches.
Resistance from the weakened static view
For some companies, busy around 1970 with
massive mergers on a scale the United States had
never seen before, the prospect of having to amor-
tize enormous amounts of goodwill – even over
40 years – was problematic. The regular reduction
in income that would result was felt to be a less
satisfactory solution than a reduction in reserves
or equity (Catlett & Olson, 1968; see also Colley
& Volkan, 1988, p. 41; Miller, 1973, p. 280, 291).
Pooling of interests
In parallel to the ‘‘doctrinal resistance’’, pres-
sure was put on members of the APB, with a cer-
tain degree of success. The result was a ‘‘modern’’
and ‘‘bene?cial’’ version of the static solution:
pooling of interests. Until 1950, the only business
combination method that existed was the purchase
Y. Ding et al. / Accounting, Organizations and Society 33 (2008) 718–755 735
accounting method (Catlett & Olson, 1968, p. 45).
Pooling of interests was ‘‘discovered’’ in 1950 with
ARB 40 (AIA, 1950), but was not of great interest
until 1957 because the write-o? method was nei-
ther yet discredited nor prohibited. But starting
from 1957, in a high-in?ation context that saw
goodwill values shoot up, pooling began to play
a strategic role for companies who were reluctant
to amortize and wished to carry on using practices
similar to write-o?s (Catlett & Olson, 1968, pp. 3–
4). Throughout this period there was great pres-
sure to broaden the criteria for application of the
pooling of interests method. The struggle was
not yet over: in 1969, the APB considered prohib-
iting pooling in a political environment calling for
checks on mergers, seen as bad for national
employment (Spacek, 1972). Prominent authors
like Brilo? (1967, 1968) and Brilo? and Engler
(1979) sharply criticized what they called ‘‘dirty
pooling’’. But once again, under pressure from
businesses the APB backed down.
4
In the end, the pooling of interests method
could be used by any group undertaking a merger
by exchange of stock. While this meant that the
write-o? technique was no longer as widely
accepted as in the previous period, it remained
possible to use it in a particularly favourable form
(elimination of goodwill with no impact on
reserves) for some merger transactions.
Resistance by the actuarial view
As Hughes (1982) pointed out, there are few ref-
erences to the actuarial doctrine in publications
over the period 1958–1980. Only a few authors,
like Knortz (1970), and especially May (1943,
1957), quoted in Catlett and Olson, 1968, pp. 88–
89 and Gynther (1969), dared to speak openly in
defence of this approach.
After 1972, the dynamic doctrine took over, but
the desire to use the actuarial approach remained
at the back of the minds of a good many US busi-
nesses. This fact is important to fully understand
the current situation.
France (1982–2005)
After a period of more than 60 years’ ‘‘stagna-
tion’’ in France, this phase brought sudden signs
of a clear change in treatment of goodwill, and
the dynamic approach became more popular.
The ?rst sign came in the third postwar o?cial
General Accounting Plan issued in 1982. This rein-
troduced a goodwill amortization account, and
stated that ‘‘intangible items making up goodwill
do not necessarily bene?t from legal protection
that confers a certain value’’ (CNC, 1982, p.
120). Thus a degree of incentive for amortization
for accounting (rather than tax) purposes
appeared.
The move towards the dynamic approach was
con?rmed by the regulations governing consoli-
dated accounts. Decree 67–236 on companies,
amended following the law of 1985 on consoli-
dated ?nancial statements, ruled that unallocated
goodwill arising on ?rst consolidation ‘‘must be
included in income over a period of amortization’’,
while regulation 99-02, paragraph 21130 of 1999,
stated that ‘‘the amortization period must. . .
re?ect the assumptions used and objectives evi-
denced at the time of acquisition’’.
It is true that even the regulations used the ?ex-
ibility allowed by the seventh directive, and intro-
duced the possibility for French groups to write o?
goodwill against reserves. But contrary to its Ger-
man counterpart, the French regulator decreed
that this write-o? could only happen ‘‘in excep-
tional circumstances duly justi?ed in the notes’’
(Decree of March 23, 1967 modi?ed in 1986, Sec-
tion 248-3). Clearly, the aim was to restrain the use
of the weakened static approach in favour of the
dynamic view.
The last issue deserving our attention is pooling.
At the beginning of the period, the method was
totally absent from French regulations. It was only
in 1999 that the French regulator, not wishing to
‘‘disadvantage’’ French groups, decided to intro-
duce this treatment of goodwill into French regu-
lations (CRC, 1999, Section 215). But pooling
was rarely used for two main reasons. First, it
4
Interestingly, after the adoption of SFAS 141 and 142,
Brilo?, in an interview, criticized the new rule because of the
leeway it gives management for determining when goodwill has
become impaired. Brilo? even stated that he had ‘‘laboured for
30 years to get rid of pooling accounting and [was] sorry [he]
did’’ (interview given to the AIMR’s The Financial Journalist
E-Newsletter for January 2002 –http://www.newswise.com/
articles/view/?id=FJJAN.IMR).
736 Y. Ding et al. / Accounting, Organizations and Society 33 (2008) 718–755
was allowed as an exception, subject to strict con-
ditions. Second, and probably more importantly, it
appeared on the French scene not long before the
regulator announced plans to put an end to its use.
The ?nal question is why most French compa-
nies (with enough in?uence to achieve substantial
change in the regulations) wanted to adopt a
dynamic approach. The main reason for the move
towards a dynamic approach was, we believe, a
process of imitation: in order to build an interna-
tional reputation, large French companies had to
comply with US and/or international rules, i.e.
rules which at the time favoured the dynamic treat-
ment of goodwill (IASC, 1993). The third
‘‘French’’ phase was in fact an international phase
dictated by the dominant accounting solutions of
the worldwide shareholder model (see below).
Great Britain (1990–2005)
The period from 1990 to the modern day saw
the arrival of laws in Britain that either recom-
mended or imposed amortization of goodwill. To
fully understand this evolution, we need to look
at what was happening in international standards.
In 1990 ED 47 (ASC, 1990) recommended system-
atic amortization of goodwill, but no ?nal draft
followed due to ?erce opposition by businesses
(Brown, 1998, p. 61; Paterson, 2002b). In 1993, a
discussion paper (ASB, 1993) also recommended
systematic amortization, and in 1997, FRS 10
(ASB, 1997), preceded by FRED 12, made capital-
ization plus systematic amortization over a period
of up to 20 years the preferred method, although
non-amortization with application of an annual
impairment test was also allowed.
As company law required goodwill to be amor-
tized, and considered that non-amortization was
justi?ed only if necessary to provide a true and fair
view, and even then subject to providing evidence
that the goodwill had an inde?nite life, it is possi-
ble to assert that systematic amortization was the
basic new rule.
Overall, in spite of the fact that goodwill was
yet not formally recognized as a true asset, the
rules were clearly leaning towards the dynamic
solution. But an alternative approach was still
allowed as an option. This dualistic stance can be
interpreted in two ways:
– the most plausible interpretation is that the
British standard-setters had to yield to the solu-
tions adopted in the United States and the
IASC (1993), which favoured systematic
amortization;
– but alternatively, it may indicate that some Brit-
ish businesses were looking to replace the write-
o? practice by another, more favourable
approach: non-amortization with impairment
tests. This would make the issue not write-o?
vs. amortization, but write-o? vs. the actuarial
approach.
Germany: the (short) dynamic phase (2000–2005)
In a context of globalization and the rising
power of the American corporate governance
model, backed by certain international accounting
organizations such as the IASB, it is not surprising
that there were many calls in Germany at the end
of the 20th century to end German ‘‘peculiarities’’
and align practices with the dominant American
views.
In 1998, the law ‘‘on the facilitation and the
reception of capital’’ (KapAEG) introduced an
article (292a) in the German Commercial Code
allowing German groups (until 2004) to adopt
IAS and even US GAAP for consolidated
accounts, provided these rules were compatible
with the European Directives and the GoB (‘‘Grun-
dsa¨ tze ordnungsma¨ ssiger Buchhaltung’’, i.e. ‘‘Princi-
ples of proper accounting’’ – German GAAP).
The DSR (Deutscher Standardisierungsrat –
German Accounting Standards Board), a new
body charged by the Ministry of Finance to forge
new regulations for consolidated accounts, con-
?rmed with its ?rst standard, DRS1 (DSR,
1999), that American rules could be considered
as equivalent to the GoB. Then in July 2000, the
DSR published DRS4 (DSR, 2000) on the ‘‘acqui-
sitions of companies and group accounts’’. This
DRS, schematically: (1) imposes systematic capi-
talization of goodwill as an element of the compa-
nies’ wealth (DRS 4.1f); (2) prohibits all write-o?s
against equity (DRS 4.27–29); (3) imposes system-
atic amortization (normally straight-line) over the
period of use, up to a limit of 20 years (DRS 4.31).
An impairment loss may be booked in addition to
this amortization if the recoverable value is lower
Y. Ding et al. / Accounting, Organizations and Society 33 (2008) 718–755 737
than the net book value (DRS 4.34). Clearly, as a
whole, the DRS espoused the IASC’s positions,
themselves fundamentally in line with American
conceptions at the time.
In 2001 the American standard-setter published
SFAS 142 (FASB, 2001b) which rang the death
knell for systematic amortization of goodwill, in
favour of an actuarial solution (impairment based
on the estimation of future cash ?ows). The DSR
faced a dilemma: could it go on asserting that
the new American rules were compatible with
European and GoB rules?
Despite the warnings of many of the major
actors in German doctrine, such as Busse von Col-
be (2001, p. 879) and Hommel (2001, p. 1943), and
more broadly the majority of the members of the
Scienti?c Committee for Accounting (Wissenschaf-
tliche Kommission Rechnungswesen) (according to
Siegel, 2002, p. 749), the DSR, after an ‘‘animated
debate’’, published DSR1a (DSR, 2002), specify-
ing that the new American doctrine on goodwill
did not prevent adoption of FASB standards as
a substitute for GoB. It also upheld DSR4 as
before. These decisions sent shockwaves around
Germany. Even the most moderate of commenta-
tors underlined the totally contradictory nature of
the two standards, and the apparent illegality of
the adopted American rule in view of the seventh
directive and the GoB (Busse von Colbe, 2004;
Duhr, 2003, p. 974; Moxter, 2001, p. 1; Schild-
bach, 2005, p. 1; Krawitz cited in Siegel, 2002, p.
749). The only remaining hope for these numerous
objectors was the possibility of a veto by the Ger-
man Ministry of Justice. Unfortunately for them,
the DSR standard was rati?ed on April 6, 2002.
As all this shows, the struggle over goodwill has
been played out in very dramatic conditions in
Germany. Against very strong resistance by the
German doctrine to the new American position,
the defenders of the new international order
needed to force a passage for the new philosophy
of impairment, in anticipation of its rati?cation
by the European Union.
Phase 4: the actuarial phase
The ideal dreamed of by authors like May (1957),
who had recommended non-amortization of good-
will, came true for the ?rst time independently of
any tax considerations in the United States at the
end of the second half of the 20th century.
US (2001–nowadays)
The adoption of an actuarial conception of
accounting in the US goes back to the Concept
Statements (CS) No. 5 (FASB, 1984) and 6
(FASB, 1985). But its application took time. Only
after more than 20 years did the revolution actu-
ally happen, with the adoption of SFAS 141 and
142 (FASB, 2001a, 2001b) to supersede APB
Opinion No. 16 and 17 (AICPA, 1970a, 1970b),
a major event in the United States. Under these
new standards, goodwill, whether acquired indi-
vidually or in a business combination, will no
longer be amortized but submitted to an impair-
ment test, by comparing the fair value of reporting
unit goodwill with the carrying amount of that
goodwill (FASB, 2001b, Section 20). These new
standards represent a victory for the actuarial
approach: goodwill is an asset whose value
depends on future factors.
Other countries: moving towards the actuarial
phase?
As this article was being written, another
important event took place: the adoption in March
2004 of standard IFRS 3 (IASB, 2004b) which
replaces IAS 22 (IASC, 1993), and the revised
standard IAS 38 (IASB, 2004a). IFRS 3 requires
goodwill acquired individually or in a business
combination to be recognized as an asset, prohib-
its amortization of goodwill acquired and instead
requires the goodwill to be tested for impairment
annually. As the IASB explicitly states (2004b,
Section IN3), ‘‘it would be advantageous for inter-
national standards to converge with those of Aus-
tralia and North America’’.
Since all listed EU companies have been obliged
to prepare their consolidated ?nancial statements
under International Accounting Standards/Inter-
national Financial Reporting Standards from
2005 onwards (European Union, 2002), the three
other countries in our study, Great Britain, Ger-
many and France entered the actuarial phase in
2005, at least for the consolidated ?nancial state-
ments of listed companies.
738 Y. Ding et al. / Accounting, Organizations and Society 33 (2008) 718–755
Discussion
The reasons for the new solution
The actuarial solution has been seen by some
authors as an ‘‘optimal’’ solution in that it enables
a business to manage results better (Kleindiek,
2001, p. 2576; Ku¨ ting & Reuter, 2005) and, at
macroeconomic level during the life of the ?rm,
to increase the mass of assets without diminishing
the mass of results, by postponing recognition of
impairment to the last moment when companies
are in a state of bankruptcy (see Paterson, 2002a,
for a similar view). For a short-term-oriented man-
ager or shareholder, this actuarial view is much
‘‘better’’ than the pure static view, which leads to
massive losses at the beginning of the investment
cycle, ‘‘better’’ than the weakened static view,
which produces a decrease in equity and so weak-
ens ?rms’ leverage, and even ‘‘better’’ than the
dynamic view, which reduces earnings all along
the cycle (Richard, 2004a, 2004b).
Pooling was a good solution for pro?t but not
for the balance sheet: it created ‘‘hidden reserves’’
(Johnson & Petrone, 2001, p. 101) which was
problematic in a context where ?rms seek to dis-
play their ‘‘strength’’ to their shareholders. It also
had a very bad reputation and prevented compara-
bility of results (FASB, 1998, 1999; Johnson &
Yokley, 1997; Johnson, 1999, p. 80). The new
actuarial solution was seen as ‘‘optimal’’ in the
sense that it o?ered nearly all the ‘‘advantages’’
of pooling, without its ‘‘disadvantages’’.
It is interesting to note that the actuarial
approach was generally judged a good solution
by the ‘‘elites’’ of the countries studied at the time
(see below).
US
Why was the US the ?rst to refuse the static
solution (pure or weakened), ?rst adopting the
dynamic solution then switching to the actuarial
approach, and why did it take the other countries
so long to choose the dynamic and actuarial
solutions?
As far as the US is concerned, our study is in
line with recent research by economists, especially
Lazonick and Sullivan (LS in the rest of the paper)
(2000) and Aglietta and Re´be´rioux (AR in the rest
of the paper) (2004). These authors have shown
that ‘‘corporate governance for most US corpora-
tions, from their emergence in the late nineteenth
and early twentieth century through the 1970s,
was based on the strategy of retain and reinvest’’
(LS, p. 24). They have also shown that throughout
this period, the pressure of professional stock mar-
ket investors was very low (LS, p. 31) and that
‘‘top managers tended to be integrated with the
business organizations that employed them’’ (LS,
p. 24) which means that the power was generally
in the hands of block shareholders and banks
(stakeholder model). Our study shows that this
retain-and-reinvest strategy was nevertheless in
decline as the accounting system moved from a
pure static to a dynamic stance. The reason for this
decline is presumably linked to the ‘‘conglomera-
tion mania’’ and ‘‘massive expansion of corpora-
tions that had occurred during the 1960s’’ that
‘‘resulted in poor performance’’ and ‘‘huge debt
burdens’’ in the 1970s (LS, pp. 15–17): to cope
with this situation, big American corporations
were obliged to switch their accounting system to
a dynamic solution.
Due to international competition, the American
economy turned towards a more ?nancial
approach with a focus on short-term gains (LS,
pp. 15–16). There was progressive deregulation
of the banking sector in favour of savings and
loans institutions (LS, p. 17), and rapid develop-
ment in pension and mutual funds. This rise in
the importance of professional shareholders was
accompanied by a fall in the strength of trade
unions, as job tenure diminished (LS, pp. 19–21).
All these converging factors explain why the power
went to short-term-oriented professional share-
holders, and why there was a strong trend towards
maximum short-term pro?ts, with distribution of
massive dividends evidenced by the rising pay-
out ratios in the 1980s and 1990s (LS, p. 22; AR,
p. 83). It is no wonder that abandoning the
dynamic solution for the actuarial solution was
the natural consequence of this evolution.
In the course of this development, managers
disappeared from the scene. Their role in the
power game is, of course, contested. According
Y. Ding et al. / Accounting, Organizations and Society 33 (2008) 718–755 739
to the famous Berle and Means thesis (1932), in
most large American companies, managers
achieved power due to the dispersion of shares.
This theory has also been used as one of the pillars
of the agency theory, whose main purpose is to
?nd a way to solve the fundamental con?ict
between managers and shareholders (Jensen &
Meckling, 1976). But the Berle and Means thesis
has been challenged by Zeitlin (1974) and many
other authors. This kind of position has been
taken up recently by Lazonick and O’Sullivan,
who point out that contrary to those who have
argued ‘‘often without justi?cation, that the man-
agers who control the allocation of corporate
resources and returns are self-serving in the exer-
cise of this control’’, ‘‘shareholders and [our
emphasis] top managers have certainly bene?ted
under the rule of shareholder value’’ (2000, p. 27).
As far as accounting for goodwill is concerned,
it is di?cult to ?nd any expression in the American
literature of top management opposition to the
concealment of systematic amortization of good-
will. Globally speaking it seems, as one leading
American economist appears to acknowledge (Sti-
glitz, 2003, p. 175), that managers have followed
the holders of power, i.e. the professional
shareholders.
The actuarial method adopted in the US also
o?ers an interesting example, supporting the the-
ory developed by Robson (1993) on the gap
between the outcomes of accounting regulation
and the calculations of actors involved in the pro-
cess. The major selling point of non-amortization
and impairment testing of goodwill is that it
should provide accounting numbers closer to the
true market value, and therefore more useful to
investors. However, ‘‘while goodwill impairment
must be regularly assessed, the actual application
of SFAS 142 results in recognizing goodwill cre-
ated by the reporting entity subsequent to the pur-
chase combination, to the extent that this replaces
or o?sets impaired goodwill, so in many cases
impairments will not be recognized even when
the value of the acquired operations has declined.
This approach which reverses the longstanding
ban on recognizing created (as opposed to pur-
chased) goodwill was necessitated by the virtual
impossibility of separately identifying elements of
goodwill having alternative derivations. Even with
this simplifying approach, measurement of good-
will impairment is a fairly di?cult task, often
requiring the services of independent valuation
consultants’’ (Delaney, Nach, Epstein, & Budak,
2003, p. 427). Given that fair values are not readily
available for many of the reporting units to which
goodwill balances were assigned, managers enjoy a
certain amount of discretion when applying this
standard (Bens, 2006). Beatty and Weber (2006)
show empirically that in the adoption of SFAS
142, ?rms’ equity market concerns a?ect their pref-
erence for above-the-line vs. below-the-line
accounting treatment of goodwill, and ?rms’ debt
contracting, bonus, turnover, and exchange delist-
ing incentives a?ect their decisions to accelerate or
delay expense recognition.
Great Britain
To continental European actors, Great Britain
is often associated with the idea of stock market
domination and dispersed shareholders, like the
US, possibly to an even greater degree. But this
is a false picture. Historians of British business
have shown that ?nancial capital and especially
stock market capital only began to play a leading
role for the majority of large British ?rms in the
1970s (Wilson, 1995, p. 193), and that ‘‘the share-
holder pre-eminence achieved in the 1980s and
1990s, far from being a normal state of a?airs, is
an anomaly’’ (Davies, 2002, quoted by Armour,
Deakin, & Konzelmann, 2003, p. 2). Before that
period, the family ?rm directed by ‘‘gentlemen’’
(i.e. owner–managers) was the dominant feature
of the British economy (Coleman, 1987, p. 8;
Gourvish, 1987, pp. 33–34; Wilson, 1995, p. 155).
It is therefore unsurprising that until that time,
self-generated capital was still the most popular
means of funding investments (Hannah, 1983, p.
62; Wilson, 1995, p. 129–130). If we add that Brit-
ish banks went on pursuing a conservative strat-
egy, it is easy to understand why the traditional
weakened static solution initiated by Dicksee
(1897) could have been so successful for so long:
it guaranteed satisfaction for both self-?nancing
family owners and prudent bankers alike. This de
facto alliance between creditors and long-term
740 Y. Ding et al. / Accounting, Organizations and Society 33 (2008) 718–755
investors was particularly acute during the inter-
war years, as stressed by Edwards (1989, p. 138)
and Maltby (2000), but has had very long-term
consequences for goodwill. Of course from the
1970s, with the growing importance of ?nancial
capital, the British economy became a kind of
dualistic economy, with the persistence of the tra-
ditional family ?rm on one hand, and the rise of
international giants ?nanced by external capital
on the other. This explains why, when discussion
of SSAP 22 was going on in the early 1980s, there
was a clash between proponents of the weakened
static view and tenants of the dynamic approach.
With the era of takeover bids (the second half of
the 1980s) and the need to in?ate balance sheets
in order to ward o? predators, the static solution
became more and more problematic for many
British giants. This, plus the in?uence of the dom-
inant international solutions of the time, may well
explain why the dynamic solution emerged in Brit-
ain in the 1990s. Although, as Armour et al. (2003,
p. 22) underline, the provisions of European Com-
munity Directives could be ‘‘a major countervail-
ing force to shareholder primacy’’, the fact is
that in 2002 a signi?cant majority (74%) of British
CFOs stated that companies were eager to apply
IAS before 2005, presumably because Great Brit-
ain has a strong capital market (Holgate & Gaul,
2002).
Germany
Germany is the country where the pure or weak-
ened static solutions have taken the longest to dis-
appear. This is not surprising: until quite recently,
say the mid-1990s, the environment was very hos-
tile to shareholder value. Only after that period
were there signs that a change might be welcome.
As is well known, the traditional German system
of governance is based on three pillars (Ju¨ rgens,
Naumann, & Rupp, 2000, p. 59): the banks, co-
determination and company-centred management.
Up to 1998 the role of the stock market and pri-
vate pension funds in German companies’ ?nanc-
ing was marginal (Deutsche Bundesbank, 1999,
p. 25, cited in Ju¨ rgens et al., 2000, p. 62). The
power was largely in the hands of the big German
families and the banks, but under pressure from
employee representatives. These three groups, the
basis of the stakeholder model, form the tradi-
tional ‘‘governing coalition’’ (Hackethal, Schmidt,
& Tyrell, 2003). In 1992 the banks held no less
than 61% of the voting rights of the top 100 listed
companies by virtue of proxy votes (Baums & Fra-
une, 1995, p. 103). The in?uence of employee rep-
resentatives, although variable, was quite
important in a majority of supervisory boards
(Gerum, 1991). In this context, the problem was
not how to create value in the short-term and dis-
tribute dividends, but how to be self-?nancing,
reimburse bank loans and guarantee the stability
of the workforce in the long-term. Even German
managers, trained as technical rather than ?nan-
cial engineers (Eberwein & Tholen, 1990), were
party to the consensus in favour of accumulation
of wealth. No wonder that in these conditions,
accounting, and accounting for goodwill in partic-
ular, was directed towards prudence and retaining
income for the sake of creditors and their allies,
the managers. This fundamental characteristic
has been demonstrated by German authors (Barth,
1953; Beisse, 1993; Do¨ llerer, 1971; Moxter, 1998;
Scho¨ n, 1997; Weber-Grellet, 1999) as well as
French authors (Richard, 2002a).
But in the middle of the 1990s things began to
change. A series of inquiries (Fo¨ rschle, Glaum, &
Mandler, 1998) showed that, in a context of mar-
ket globalization and the need (partly resulting
from German reuni?cation) to ?nd new ways of
?nancing on the Anglo-American stock markets,
some top managers in Germany’s largest and most
internationalized listed companies began to see
corporate development along the lines of the
model recommended by American consultants
and academics, serving shareholder value (see also
the examples given by Ju¨ rgens et al., 2000, p. 74).
Presumably under this in?uence, the government
issued a series of regulations designed to develop
a more ‘‘Anglo-Saxon’’ type of management: crea-
tion of a ‘‘German SEC’’ (1995) which merged in
2001 with the German Financial Services Author-
ity, abolition of capital gains tax (1998), authoriza-
tion for the creation of private pension funds
(1998), creation of the ‘‘new stock market’’
(1997), abolition of multiple voting rights and
restrictions on banks concerning the use of proxy
Y. Ding et al. / Accounting, Organizations and Society 33 (2008) 718–755 741
votes and cross-shareholdings (1998), introduction
of a mandatory bidding procedure in the new take-
over law of 2001, and creation of a new private
body for the promotion of international account-
ing standards.
All these measures, particularly the related
rapid development of private pension funds guided
by shareholder value principles, signi?cantly chan-
ged the landscape and style of management among
the elite major listed companies and banks (Ju¨ r-
gens et al., 2000, p. 71). This extremely fast-paced
change may explain why listed German groups
were allowed to opt for international or even
American accounting principles from 1998, and
why Brussels encountered no German opposition
to adoption of the new international rules concern-
ing treatment of goodwill in consolidated
accounts. All in all, the famous laws of 1998 on
the ‘‘Raising of Equity Relief – Kapitalaufnahme-
Erleichterungsgesetz’’ and Kontrag, as described
by German authors (Bo¨ cking & Orth, 1998,
1999; Claussen, 1998; Haller & Eierle, 2004; Hom-
melho?, Krumnov, Lenz, Mattheus, & Schru?,
1999), and analyzed by Richard (2002b, 2002c),
have encouraged a clear trend towards US man-
agement criteria for major German companies.
France
Like Britain, the case of France may appear sur-
prising. In spite of its traditional reputation as state
and family driven (the famous ‘‘cent familles’’ said
to control the country), France adopted a dynamic
treatment for goodwill (as far as consolidated
accounts are concerned) sooner than Germany
and even Britain. The explanation is relatively sim-
ple. As shown by French economists, notably by
Morin (2000, pp. 41–42), on the basis of documen-
tation provided by the Banque de France, France is
a country where the in?uence of foreign (especially
what the French call ‘‘Anglo-Saxon’’) investors is
very high. By 1985, the share of foreign ownership
on the various French stock exchanges had reached
10%; and it grew to 35% in 1997. Over that period,
probably in line with this shift of power on the
stock market, the traditional ‘‘cross-shareholding’’
model was disintegrating, especially after 1996
(Morin, 2000, p. 38). The growing in?uence of for-
eign investors, notably the North American pen-
sion funds, has driven a new style of management
oriented towards shareholder value. During the
last 10 years, the average duration of shareholding
by large investors in French listed ?rms has
decreased from 7 years to 7 months (de Kerdrel,
2006). Morin (2000, p. 45), after interviews held
in 1998 with managers of leading French compa-
nies, says he ‘‘has been able to verify that this diktat
regarding norms is being observed throughout the
CAC 40 index companies’’. He adds (p. 49) that
‘‘many directors admit that it is impossible to
escape the demands made by the US and British
investors’’, which con?rms our hypothesis of a link
between management and professional sharehold-
ers. This evolution in French capitalism from a
stakeholder towards a shareholder model is also
observable in accounting regulations: Colasse and
Standish (1998) have shown how membership of
the CNC (Conseil National de la Comptabilite´ –
National Accountancy Council), the accounting
regulatory body, has rapidly evolved in the nineties
in favour of representatives of large (listed) enter-
prises and audit companies, to the detriment of
the public sector. All these factors explain why
French accounting legislation on goodwill has, at
least since 1985, followed American or interna-
tional standards.
Impact of accounting for goodwill on the
shareholder model and the economy
At the beginning of the article we mentioned the
existence of a reverse link between accounting for
goodwill and the social and economic environ-
ment. The impact of various interest groups on
goodwill treatment has been demonstrated
throughout, and some attention should now be
given to this reverse link.
Even Brilo?, a major opponent to pooling of
interests as already mentioned, cites one argument
often put forward in support of the method:
‘‘many business combinations would not have
been consummated if ‘pooling accounting’ were
proscribed’’ (Brilo? & Engler, 1979). The implica-
tion is clear: the accounting technique has a direct
impact on the economy through the realization of
the transaction.
742 Y. Ding et al. / Accounting, Organizations and Society 33 (2008) 718–755
In a report, Plihon (2002) states that the weight
of goodwill, compared to equity, is extremely
important because of the very high-value acquisi-
tions of the 1990s. Consequently, he anticipates
that goodwill amortization will negatively impact
prospects for future pro?ts and pro?tability in
the medium term, which could lead to a rise in
the level of debt and consequently generate a risk
of insolvency and illiquidity.
Plihon’s report was written before France’s
adoption of IFRS. Taking the move to IFRS into
account, Boukari and Richard (2006, p. 84, 88)
?nd on a sample of 146 large French listed ?rms
that the adoption of IFRS in 2005 resulted in a
42% increase in 2004 net income (restated to
IFRS) compared to the original one (French
GAAP
5
). More interestingly, 60% of the increase
in net income can be attributed to cancellation of
goodwill amortization in favour of impairment.
This situation, which can reasonably be expected
in other countries switching from goodwill amorti-
zation to impairment, provides evidence of the
impact of the change in accounting standards on
net income, which, in turn favours shareholders.
Combining these two examples, the following
assumption can reasonably be reached: beyond
the improvement of pro?t through impairment,
the change in accounting regulations for goodwill
was also intended to have an economic impact:
facilitation of mergers and acquisitions.
Although we can provide no direct evidence for
this, we can quote Brown-Humes (2006), who
observes a ‘‘record amount of mergers and acqui-
sitions in Europe’’ in 2006, explaining that two
key trends encourage M&A activity: debt is cheap
and ‘‘corporate balance sheets are healthy’’.
Regarding this second reason, it can safely be
assumed that the replacement of goodwill amorti-
zation by an impairment test will lead to ‘‘health-
ier’’ balance sheets, as the reported goodwill will
not reduce future equity (as long as a material
impairment is not recorded).
Given that the shareholder model ‘‘lives on’’
business combinations, this accounting technique,
in facilitating business combination transactions,
fosters the trend towards the shareholder model.
Conclusion, limitations and directions for future
research
This article sets out to study the evolution of
accounting for goodwill in four countries, Great
Britain, the United States, Germany and France,
over a period of more than one century. We show
that at the outset these four countries were in an
identical position, with a static vision of account-
ing for goodwill, and that they are all currently
converging towards another common phase using
the actuarial approach (recognition and impair-
ment testing), as far as listed (more precisely, cap-
ital-market oriented) companies are concerned.
Interestingly, the actuarial view, which is in the
process of becoming the dominant practice, was
already in existence in the 1900s.
We have attempted to explain this evolution
with reference to the stakeholder and shareholder
models. While the stakeholder model was the most
dominant at the start of the period covered by our
study, the shareholder model is clearly the most
in?uential in our own time. The US model was
therefore the ?rst to feel the need to change the
old system (expensing or charging to reserves),
and subsequently the ?rst to adopt amortization,
then impairment testing. In the stakeholder model,
owners are more concerned for the ?rm’s long-
term viability due to their active involvement in
management, their understanding of the ?rm’s
future prospects and the relative di?culty of exits.
In the shareholder model, shareholder–owners
have lost patience and even interest in the nuts
and bolts of the ?rm’s actual business and are
demanding faster and bigger ?nancial returns.
We show that there has been an evolution in
accounting regulations on goodwill in the four
countries studied towards the actuarial phase,
which is totally di?erent from the initial phase,
the static approach.
We are of course aware that several issues and
problems remain and deserve more in-depth anal-
5
This comparison was possible because all French listed ?rms
were required to publish a comparative table showing the net
income for the previous year (i.e. 2004) computed under both
sets of standards: IFRS and French GAAP.
Y. Ding et al. / Accounting, Organizations and Society 33 (2008) 718–755 743
ysis and discussion: (1) The alternative theories
that could explain the evolution of accounting
treatments for goodwill, especially the recent inter-
national harmonization of practices; (2) the choice
of the four countries studied and the general nat-
ure of our analyses; and (3) the suitability of our
theory for explaining other accounting changes.
First, as noted earlier, the ‘stakeholder vs.
shareholder’ question is a standard theme in
?nance and corporate governance literature. How-
ever, the long-term vs. short-term orientation may
not be the only attribute di?erentiating these two
models. Because of their active involvement in
management and greater access to information,
owners in the stakeholder model do not need to
rely solely on public ?nancial accounting informa-
tion for their decision-making, and are therefore
more tolerant of less timely and less decision-rele-
vant ?nancial reporting based on historical cost.
Conversely, investors in the shareholder model
use mainly publicly available accounting informa-
tion for their decision-making and so their demand
for timely, ‘‘actuarial’’ disclosure is very high.
The international politics of accounting is also
very helpful in understanding why France and
Germany (and to a lesser extent, the UK) followed
the US on the matter of accounting treatments of
goodwill. Examining the interconnections between
international politics and accounting professional-
ization projects at local level in Greece, Caramanis
(2002) shows ‘‘how intertwined accountancy and
the broader socio-economic and political domain
are, not only at the local, but also at the interna-
tional level’’. Hirst and Thompson (1995) have
emphasized the role of politics in the ‘globaliza-
tion’ era, with particular reference to the interna-
tional accounting profession. They write that
‘‘major states may play a pivotal role, while the
authority and sovereignty of lesser states may be
continuously challenged and negotiated in a realist
fashion’’ (p. 408). Their analysis can easily be
applied to the adoption of IAS/IFRS (and there-
fore the actuarial phase of goodwill treatment) in
Europe.
Second, the choice of the four countries in our
survey is open to some debate. As explained, they
were chosen because they represent the Western
world, but we willingly acknowledge that other
countries could validly be added to the sample.
As an example of a possible future expansion on
this article, we present in Appendix 1 the results
of a preliminary investigation into a major Asian
country, Japan, showing that Japan has reached
the dynamic phase but is reluctant to adopt the
actuarial phase. Despite this reluctance, it can rea-
sonably be assumed given the current trend
towards IFRS that Japan will also converge to
the actuarial approach. China could be another
interesting example. Its capital market, founded
at the beginning of the 1990s, now lists more than
1400 companies. Most of these companies are still
clearly operating under the stakeholder model: a
large portion of their shares (around 60% on aver-
age) is held by the State, other State-owned ?rms
or families (Ding, Zhang, & Zhang, 2007). How-
ever, things have been changing very fast in China
recently. After the reform of 2005, the State-owned
shares in most listed companies became tradable.
About 200 mutual funds are now operating in
China and foreign investment funds are also
allowed to enter, subject to approval. Also, since
2006 stock option incentive plans have begun to
spread in Chinese ?rms. To accompany all these
developments China began a major accounting
harmonization move on January 1, 2007, adopting
accounting standards very close to IAS/IFRS,
including the actuarial approach for goodwill
treatment, and capitalization of development
costs. In this context, the adoption of the actuarial
approach is certainly an advantage for short-term-
oriented investors.
In Japan and China, the international politics
of accounting may provide an enlightening analyt-
ical framework. These countries, like many others,
are having to accept the new rules of the account-
ing ‘‘world game’’, because not joining in endan-
gers their participation in the world economy.
But the shareholder model remains important in
a context of international politics, for two reasons:
‘‘contagion’’ and ‘‘acceptance’’. ‘‘Contagion’’, as
the word suggests, means that a new type of
accounting can only be explained by the emer-
gence of shareholder power in the ‘‘key’’ countries
that ‘‘set’’ the rules of worldwide accounting gov-
ernance. The source of all change is, in our opin-
ion, linked to the history of these key countries.
744 Y. Ding et al. / Accounting, Organizations and Society 33 (2008) 718–755
Meanwhile, ‘‘acceptance’’ – willing or under dur-
ess – in countries still marked by the stakeholder
model of the new game rules that favour share-
holder interests can only come about if the coun-
try’s political power is not fundamentally
opposed to shareholder interests.
Finally, another interesting area for exploration
would be a search for other balance sheet items
that may be facing the same changes as goodwill.
As shown by Richard (2005c), France has seen
an evolution from the ‘‘static’’ to the ‘‘dynamic’’
phase for most assets. While the actuarial phase
may not yet concern tangible ?xed assets and most
intangible assets, the actuarial value ‘‘germ’’ may
well be progressively spreading through the struc-
ture proposed by the IASB, particularly as the
principle of systematic amortization of intangible
assets has been abandoned for assets with an
inde?nite useful life (Richard, 2005c, p. 115). More
generally, we have some examples apparently indi-
cating that goodwill cannot be an isolated case:
these examples concern long-term investments,
development costs and environmental expenses.
The case of long-term investments is particu-
larly interesting. In around 1900, there appears
to have been no speci?c treatment for such items,
which were accounted for statically in the same
way as short-term investments, with adjustment
for changes in their market value (although for
reasons of conservatism, often only downward
changes were recorded). Then during the 20th cen-
tury the dynamic view emerged, with a move to
di?erentiation between long-term investments
and short-term investments, suggesting that only
long-term investments should be valued by the
cost method or the equity method, or that market
?uctuations that are ‘‘other than temporary’’
should be eliminated. Another frontier was crossed
with the arrival of IFRS (see IAS 39, IASB, 2003):
for certain items, e.g. ?nancial assets designated at
fair value through pro?t or loss, valuation based
on an actuarial method was allowed.
The treatment of development costs also reveals
the same trends as those identi?ed in our historical
discussion (see Richard, 2004a). In around 1900,
the normal accounting method for these costs
was immediate expensing (the static view). Then,
throughout the 20th century, people argued for
capitalization followed by amortization (Richard,
2005c, p. 105), and this dynamic solution was the
approach selected by the IAS (see IAS 38, IASB,
2004a), after its initial acceptance for certain
restricted situations (in some countries, for exam-
ple, capitalization was limited to exploration costs
only). Actuarial valuation of these expenses may
(still?) be a problem, but it can be considered that
the new conception of goodwill is encouraging an
actuarial approach to treatment of intangibles.
Finally, the treatment of environmental
expenses is a recent issue, and was unknown at
the start of the 20th century. This makes historical
comparison impossible, but a theoretical compari-
son can be sketched out. Taking the case of dis-
mantling costs for a nuclear power plant, for
example, the early 20th century lawyers in favour
of the static approach would clearly not have
approved of capitalizing such expenses, as they
relate to a ?ctitious asset with no liquidation value.
And yet this was the approach later taken by IFRS
and many of today’s laws. Environmental
expenses are capitalized and amortized over a cer-
tain period in a standard dynamic approach – and
some regulations go further and recommend dis-
counting. This vision, which has attracted severe
criticism from proponents of an ecological view
that objects to decreasing ecological liabilities to
the detriment of future generations, re?ects how
far actuarial reasoning has penetrated.
We must not allow ourselves to be misled by
these examples. There are several others that illus-
trate opposite trends, precisely because of the mul-
tiplicity of in?uences that can operate
simultaneously. In France, for example, now IFRS
have been adopted, it is no longer possible to
amortize advertising or training costs, and this is
a ‘‘step backwards’’ compared to the principles
of the dynamic accounting view. The internation-
alization of accounting can visibly bring certain
independent trends in individual countries to an
end, but may also be explained in the context of
a broader view.
To conclude, meticulous historical and geo-
graphic research into the changes in treatment of
the main types of asset and liability is necessary
to determine whether the theories in this article
are of general relevance. We believe that its essen-
Y. Ding et al. / Accounting, Organizations and Society 33 (2008) 718–755 745
tial merit is to raise the question of the evolution of
accounting capitalism, and o?er ‘‘old’’ European
accounting theories as an ‘‘archetype’’ (to borrow
the term used by Roberts, 1995) to settle the fun-
damental question of the classi?cation and evolu-
tion of accounting systems.
Acknowledgements
The authors would like to thank Anne d’Arcy,
Salvador Carmona, David Cooper, Garry Carne-
gie, Giuseppe Galassi, Luca Zan and participants
at the 3rd Workshop on Accounting and Regula-
tion (Siena, Italy, 2004), the ‘‘Accounting, Audit-
ing and Publication’’ Workshop (University of
Paris Sorbonne, IAE, 2004) and the EAA Annual
Congress (Go¨ teborg, Sweden, 2005) for helpful
comments. They also thank Hideki Fujii, Akihiro
Noguchi, Chikako Ozu and Kenji Shiba for their
valuable comments on Japanese regulations. The
authors are particularly grateful to Anthony Hop-
wood (the Editor) and the two anonymous review-
ers for their insightful suggestions. Responsibility
for the ideas expressed, or for any errors, remains
entirely with the authors. Herve´ Stolowy acknowl-
edges the ?nancial support of the HEC Founda-
tion (project F042) and the European
Commission (project INTACCT). He is a member
of the GREGHEC, CNRS Unit, UMR 2959. Jac-
ques Richard is a member of the CREFIGE. Part
of the research was conducted when the ?rst
author was a?liated to HEC School of Manage-
ment, Paris. The authors thank Ann Gallon for
her much appreciated editorial help.
Appendix 1. The case of Japan
The static phase (1967–1997)
Group ?nancial reporting is a relatively recent
development in Japan compared with the United
Kingdom and United States. ‘‘Financial reporting
in Japan has traditionally emphasized parent com-
pany ?nancial statements rather than consolidated
?nancial statements’’ (Nobes & Parker, 2006, p.
256). Very little has been written on the Japanese
treatment of goodwill. ‘‘The AICPA summary of
Japanese accounting (1987) notes that inter-corpo-
rate purchases are rare in Japan’’ (Dunne & Rol-
lins, 1992, p. 196).
The rules relating to non-consolidation good-
will and consolidation goodwill are to be found
in quite separate sources of authority. The non-
consolidation goodwill rules (which are relevant
for tax deductibility purposes) come from the
Commercial Code, whereas consolidation good-
will is regulated by the Securities and Exchange
Law and the Business Accounting Deliberation
Council (Cooke & Kikuya, 1992).
In March 1965, after an accounting scandal
involving the use of transactions between subsidi-
aries to manipulate earnings, the necessity of man-
datory consolidated ?nancial statements was
recognized. The government requested the Busi-
ness Accounting Deliberation Council to study
requirements for consolidated ?nancial state-
ments. In May 1967, the o?cial report ‘‘Opinion
on Consolidated Financial Statements’’ was issued
(BADC, 1967). This report was not an o?cially
endorsed accounting standard. On June 24, 1975,
the Business Accounting Deliberation Council
issued its ?nal opinion ‘‘Accounting Principles
for Consolidated Financial Statements’’ (BADC,
1975) which was endorsed the same day by the
Ministry of Finance (Ballon, Tomita, & Usami,
1976).
Purchased goodwill (non-consolidation good-
will) (called Noren or Eigyoken), but not consoli-
dation goodwill, is deductible for tax purposes
over a period of 5 years or less (Walton et al.,
2003, p. 191).
The 1967 report (Section 5.4) stated that ‘‘a
consolidation adjustment [Renketsu Chosei Kan-
jyo, the term used to refer to goodwill in Japan]
can be amortized for certain periods in the consol-
idated ?nancial statements. If it is of a small
amount, it can be charged in the income statement
of that period’’. There is no speci?ed amortization
period. It should not however be forgotten that the
1967 report was merely an opinion, and had no
legal backing.
The 1975 Opinion, which is the ?rst endorsed
accounting standard on consolidation, requires
that goodwill arising on consolidation must be
746 Y. Ding et al. / Accounting, Organizations and Society 33 (2008) 718–755
amortized by not less than the average annual
amount over its estimated useful life, with no max-
imum period speci?ed. However, the Commercial
Code provides that [non-consolidation] goodwill
shall be amortized by not less than the average
annual amount within 5 years after the acquisition.
In practice, therefore, [consolidation] goodwill is
amortized within 5 years or written o? immedi-
ately in the pro?t and loss account, in accordance
with the requirements of the Commercial Code
(Cooke, 1993, p. 465; Cooke & Kikuya, 1992, p.
210; Lee & Choi, 1992, p. 222; Nobes, 1991, p.
64; Nobes, 1993, p. 50; Nobes & Norton, 1996,
p. 183, table 2, p. 184, table 3; Nobes & Norton,
1997, p. 139; Sakurai, 1996, p. 485).
No weakened static phase
This phase is identi?able in all the countries
except France, as mentioned earlier, and Japan.
The Japanese situation can probably be explained
by the relatively late arrival of regulations on
goodwill. When the 1967 and 1975 texts were pub-
lished, it was necessary to educate companies, and
amortization over a short period appeared the
most ‘‘reasonable’’ solution, particularly as it was
in line with the treatment applicable for non-con-
solidation goodwill.
The dynamic phase (1997–nowadays)
An amendment to the consolidation policy and
procedures (BADC 1975 Opinion) was released in
1997 and became e?ective from ?scal years begin-
ning on or after April 1, 1999. Major changes for
business combinations resulting from acquisitions
include the following: the amortization period for
the consolidation adjustment, i.e. goodwill, arising
on business combinations has been extended from
5 years to the maximum of 20 years (Walton et al.,
2003, pp. 191–192). Japanese companies had com-
plained that this ?ve-year period fell far short of
the 40 years allowed for US companies, and could
be an obstacle to their M&A strategies. The new
Japanese regulation corresponds to the period
speci?ed in the IASC standards.
The BADC also issued a Statement of Opinion,
‘‘Accounting for Business Combinations’’, on
October 31, 2003. This standard, which does not
replace the 1975 Opinion, as it deals with pur-
chased (non-consolidation) goodwill, states that
goodwill is to be systematically amortized over
20 years or less, and must also be subject to an
impairment test. The standard is e?ective for ?scal
years beginning on or after April 1, 2006. By issu-
ing this text, the BADC has aligned the treatment
of non-consolidated accounts and consolidated
?nancial statements.
Resistance to the actuarial view
Japan can be considered as a ‘‘recalcitrant’’
country. In a letter sent to the IASB dated Novem-
ber 2, 2001, the Chairman of the ASBJ (Account-
ing Standards Board of Japan) wrote the
following: ‘‘We are opposed to non-amortization
of goodwill (. . .) and we believe that goodwill
should be amortized within a certain period and
be subject to impairment when necessary’’.
6
On
April 2, 2003, The Japanese Institute of Certi?ed
Public Accountants sent a comment letter to the
IASB on ED 3, taking a position similar to that
expressed by the ASBJ in 2001.
7
In a release published in January 2006, the
ASBJ stated that ‘‘as a new Japanese standard
on business combinations will become e?ective in
2006, the ASBJ will make at least a tentative deci-
sion after reviewing the responses from market
participants, the implementation of IFRSs and
new developments discussed by the IASB and the
FASB’’.
8
There are several explanations for Japan’s
‘‘resistance’’ to the actuarial view. First, Japanese
accounting came late to the practice of consoli-
dated accounts. Second, the ASBJ declared in
2001: ‘‘We consider that IASB’s intention to set
up the accounting standard for goodwill by uncrit-
ical reference to the new standard in the United
States is too hasty. This new standard has only just
6
This letter can be found on the ASBJ website (http://
www.asbj.or.jp).
7
This letter can be found at the following address: http://
www.jicpa.or.jp/n_eng/e20030402.pdf.
8
This release can be found at the following address:
www.iasplus.com.
Y. Ding et al. / Accounting, Organizations and Society 33 (2008) 718–755 747
been issued in July 2001 and, in particular, the
appropriateness of non-amortization approach
and validity of impairment tests have not yet been
veri?ed at all. The IFRS, as an internationally
accepted accounting standard, should be carefully
established with discretion and we believe that ver-
i?cation of the e?ectiveness of the new US stan-
dard is necessary even if we are merely referring
to it’’.
9
This statement indicates a certain reluc-
tance to apply a rule without attentive examina-
tion and analysis. Third, the stakeholder model is
much stronger in Japan than the four countries
in our main study. ‘‘At the end of World War II,
Japan was confronted with the enormous task of
rebuilding its war-torn economy. With a limited
equity market and savings destroyed, govern-
ment-supported debt ?nancing was the only avail-
able source of funds. Encouraged by the
government and ?nanced by the Bank of Japan,
new enterprise groupings were formed around
Japan’s major commercial banks. These new
Keiretsu replaced the former Zaibatsu, huge pre-
war conglomerates, as the major engines of
Japan’s post-war economic expansion and the
ones most likely to need access to the US securities
market. Interdependence was fostered among
Keiretsu group companies through ?nancial, com-
mercial, and personal ties. Under such arrange-
ments, the relationships between the borrowing
company, related companies, and their bank were
very close. Cross-shareholdings between borrower,
related companies, and the bank were common’’
(Choi et al., 1983).
Furthermore, the impact of goodwill on earn-
ings is a less signi?cant issue in Japan. Due to anx-
iety over individual ‘‘loss of face’’, there has
traditionally been a Japanese aversion to individu-
alized ?nancial performance-by-results appraisal
and reward systems (Hopper, Koga, & Goto,
1999, p. 76) and accordingly Japanese accounting
for goodwill is more in?uenced by the interests
of long-term-oriented stakeholders. This is con-
?rmed by Suzuki (2007) who develops the idea
that accounting can do much more than simply
promote transparency and comparability of com-
panies for the sake of shareholders and investors,
having in mind the accounting’s impacts on local
economies and societies.
Meanwhile, as noted by Hopper et al. (1999, pp.
80–81), the Japanese economic and business world
has been changing as a consequence of ?nancial
crises. ‘‘Since the banks are struggling with bad
loans, companies that previously relied upon
banks for funding are now forced into self-?nanc-
ing or must go directly to ?nancial markets [our
emphasis]’’. In this new institutional context, we
can reasonably expect that sooner or later, Japan
will also enter the actuarial phase for its account-
ing regulations on goodwill.
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Y. Ding et al. / Accounting, Organizations and Society 33 (2008) 718–755 755
doc_448313126.pdf
The objective of this paper is to illustrate that the change in shareholders’ attitude towards firms (from stakeholder
model to shareholder model) influences the accounting treatments of goodwill. Our study is based on four countries
(Great Britain, the United States, Germany, and France) and covers more than a century, starting in 1880.
Towards an understanding of the phases of
goodwill accounting in four Western capitalist countries:
From stakeholder model to shareholder model
Yuan Ding
a
, Jacques Richard
b
, Herve´ Stolowy
c,
*
a
China-Europe International Business School (CEIBS), Shanghai, China
b
University of Paris-Dauphine, France
c
HEC School of Management, Paris, France
Abstract
The objective of this paper is to illustrate that the change in shareholders’ attitude towards ?rms (from stakeholder
model to shareholder model) in?uences the accounting treatments of goodwill. Our study is based on four countries
(Great Britain, the United States, Germany, and France) and covers more than a century, starting in 1880. We explain
that all these countries have gone through four identi?ed phases of goodwill accounting, classi?ed as (1) ‘‘static’’ (imme-
diate or rapid expensing), (2) ‘‘weakened static’’ (write-o? against equity), (3) ‘‘dynamic’’ (recognition with amortiza-
tion over a long period) and (4) ‘‘actuarial’’ (recognition without amortization but with impairment if necessary). We
contribute several new features to the existing literature on goodwill: our study (1) is international and comparative, (2)
spans more than a century, (3) uses the stakeholder/shareholder models to explain the evolution in goodwill treatment
in the four countries studied. More precisely, it relates a balance sheet theory, which distinguishes four phases in
accounting treatment for goodwill, to the shift from a stakeholder model to a shareholder model, which leads to the
preference for short-term rather than long-term pro?t, (4) contributes to the debate on whether accounting rules simply
re?ect or arguably help to produce the general trend towards the shareholder model, (5) demonstrates a ‘‘one-way’’
evolution of goodwill treatment in the four countries studied, towards the actuarial phase.
Ó 2007 Elsevier Ltd. All rights reserved.
Introduction
In positive accounting literature, the ‘‘stake-
holder model’’ and ‘‘shareholder model’’ concepts
have been emphasized (Ball, Kothari, & Robin,
2000, p. 243) to explain certain properties of
accounting earnings (timeliness, conservatism).
0361-3682/$ - see front matter Ó 2007 Elsevier Ltd. All rights reserved.
doi:10.1016/j.aos.2007.07.002
*
Corresponding author. Tel.: +33 1 39 67 94 42; fax: +33 1
39 67 70 86.
E-mail address: [email protected] (H. Stolowy).
Available online at www.sciencedirect.com
Accounting, Organizations and Society 33 (2008) 718–755
www.elsevier.com/locate/aos
The stakeholder model (usually related to code-law
countries) is a highly concentrated shareholding
model where shareholders are mainly the founder
families, the state, the bank or even employees
and are actively involved in management of the
company. The shareholder model (usually related
to common-law countries) is not used as a legal
term, but refers to a speci?c corporate governance
model where ownership is dispersed and sharehold-
ers are separate from management. This literature
o?ers us an interesting framework for analysing
how the changes in actors’ forms of calculation
impact accounting regulations (Robson, 1993).
Taking the accounting treatment for goodwill
as an emblematic illustration, this article sets out
to show that the direct associations between the
stakeholder model and code-law countries, on
the one hand, and between the shareholder model
and common-law countries, on the other hand, are
open to debate. Based on a social and historical
study of four countries which have played a major
role in the Western world economy during the 20th
century, Great Britain, the United States, Ger-
many and France, we show that rather than corre-
sponding to a clear dichotomy between common-
law and code-law countries, these two models of
corporate governance relate to a gradual shift:
the stakeholder model was present in all four
countries, and has evolved over time into the
shareholder model. More precisely, we demon-
strate that the four countries studied have a com-
mon starting point (stakeholder model), a time
when shareholders were mainly insiders actively
involved in management; and from that point,
due to the capital markets’ current importance,
all of them have made their way to the common
destination of professionalization of management
and investors (shareholder model), but by di?erent
routes and at di?erent paces.
Leake (1914, p. 81) pointed out that the ‘‘word
‘Goodwill’ has been in commercial use for centu-
ries’’ and cited a reference from the year 1571.
Without looking so far back, our study still covers
a period of more than a century, starting from the
1880s. Hughes (1982, p. 24) tells us that ‘‘account-
ing literature on goodwill appeared in . . . periodi-
cals or newspapers, such as The Accountant
[which] started in 1874’’.
Our paper concentrates on ‘‘acquired good-
will’’: acquired either individually (goodwill pur-
chased when buying assets other than by buying
shares in a company [non-consolidation goodwill])
or in a business combination (goodwill purchased
by a group when buying shares in a company [con-
solidation goodwill]) (Nobes & Norton, 1996, p.
180). Internally generated goodwill is not covered,
as it involves speci?c issues in addition to those
relating to acquired goodwill (see Jennings &
Thompson, 1996).
Many articles observe a wide diversity in both
the regulations and treatments applied in practice
to goodwill (Arnold, Eggington, Kirkham, Macve,
& Peasnell, 1994; Catlett & Olson, 1968; Cooper,
2007; Hughes, 1982). In the United States, Walker
(1938a) provides tables showing prevailing prac-
tices and the diversity in the treatment of goodwill
in the balance sheet.
It is always di?cult to divide prevailing
accounting treatment into clearly dated phases.
For this study, we decided to take a time of funda-
mental change as the start of a phase. That change
generally concerns accounting regulations: newly
issued standards or exposure drafts that would
later lead to the ?nal standard constitute our pri-
mary sources. However, for the early stages (late
19th century and early 20th century) before formal
accounting regulation of goodwill, our sources are
court rulings and discussion papers written by
leading scholars of the period (‘‘doctrine’’). We
determine the phases on the basis of these
elements.
In this article, we relate the stakeholder/share-
holder models to a ‘‘balance sheet theory’’, devel-
oped by continental European scholars such as
Schmalenbach (1908) with his concept of the
‘‘dynamic (vs. static) balance sheet’’. We extend
these concepts to identify four phases in account-
ing treatment for goodwill. All the countries exam-
ined went through an initial phase that can be
classi?ed as ‘‘static’’: the idea was that the balance
sheet should relate to the ‘‘end’’ of the ?rm, with
items measured on the basis of liquidation value.
This phase is marked by great reluctance to see
goodwill as a true asset. In principle, this
‘‘unsightly, unwieldy and ‘un-valuable’ asset’’, to
borrow Dicksee’s expression (1897, p. 47), was to
Y. Ding et al. / Accounting, Organizations and Society 33 (2008) 718–755 719
be expensed immediately or at least rapidly. In the
second phase, which we call ‘‘weakened static’’,
goodwill was made to disappear within a short
time of acquisition, but by means of a write-o?
against equity. The third phase, called ‘‘dynamic’’,
as it refers to the going concern (dynamic) assump-
tion, saw widespread amortization of goodwill
over a relatively long period. Finally, during the
fourth, ‘‘actuarial’’ phase, goodwill came to be rec-
ognized as an asset, with no systematic reduction
of value.
Both individual corporate accounts and consol-
idated accounts are considered. This study
expands on previous literature on goodwill in ?ve
ways. First, it takes an international, comparative
approach, focusing as it does on four countries.
Second, it spans more than a century, starting in
1880. Third, it uses the stakeholder/shareholder
models to explain the evolution in goodwill treat-
ment in the four countries studied. More precisely,
it relates a balance sheet theory, which distin-
guishes four phases in accounting treatment for
goodwill, to the shift from a stakeholder model
to a shareholder model. The result of this general
trend is the preference for short-term rather than
long-term pro?t. This idea is consistent with the
works of economists (Lazonick & O’Sullivan,
2000) who show that in the US, companies have
gone from a ‘‘retain-and-reinvest’’ attitude (prefer-
ring immediate expenses to favour long-term
pro?t) to a short-term pro?t orientation with dis-
tribution of dividends, explaining the move from
a static phase to a dynamic and actuarial
approach. Fourth, the article contributes to the
debate about whether accounting rules simply
re?ect or arguably help to produce the general
trend towards the shareholder model. Finally, we
demonstrate a ‘‘one-way’’ evolution of goodwill
treatment in the four countries studied, towards
the actuarial phase.
The remainder of this paper is organized as fol-
lows. The ?rst section describes the existing litera-
ture on accounting regulation and the social
nature of accounting which serves as the theoreti-
cal basis of our analysis. The second section is ded-
icated to the stakeholder/shareholder models and
their relationship with the balance sheet theory
referred to earlier. This conceptual framework is
applied to the four phases of accounting treatment
for goodwill. The third section examines these four
historical phases of accounting for goodwill in
four countries, and explains their successive devel-
opment. This is followed by a discussion section
and a ?nal section concluding the article.
Accounting regulation and the social nature of
accounting
Theories explaining accounting regulation
For decades, accounting regulation has been
arousing interest among researchers. Booth and
Cocks (1990, p. 511) examine accounting stan-
dard-setting and note that its study has been pur-
sued from the perspective of ?ve general research
traditions: professional logic, neo-classical eco-
nomics, cognitive psychology, the market for
excuses and political lobbying. Lobbying has been
extensively invoked in explaining standard-setting
(McLeay, Ordelheide, & Young, 2000; Sutton,
1984; Tutticci, Dunstan, & Holmes, 1994; Van
Lent, 1997; Weetman, Davie, & Collins, 1996;
Ze?, 2002). The concept of ‘‘interest groups’’ has
also been developed (Walker, 1987) and enriched
(Robson, 1993). Con?icting agendas (Walker &
Robinson, 1994a) or inter-organizational con?ict
(Walker & Robinson, 1994b) may also explain
standard-setting. Booth and Cocks propose a
power analysis (1990, p. 524).
Nobes (1992), setting out to explain the history
of goodwill in the UK, proposes a cyclical model
of standard-setting as a political process in?uenced
by six parties: corporate managers, auditors, users,
government, international opinion and upward
force. Bryer (1995) develops another theory to
explain standard SSAP 22 (ASC, 1984) on
accounting for goodwill: he employs concepts
from Marx’s political economy.
Many authors have stressed the political aspects
of standard-setting: Hope and Gray (1982) empha-
size the role of power in the development of an
R&D standard; Laughlin and Puxty (1983) ana-
lyze the political process of standard-setting in
the light of the problem of the conceptual frame-
work and its viability; Power (1992) discusses
720 Y. Ding et al. / Accounting, Organizations and Society 33 (2008) 718–755
brand accounting in the United Kingdom; Will-
mott, Puxty, Robson, Cooper, and Lowe (1992)
theorize the process of accounting regulation and
the processes of social and political regulation gen-
erally, taking accounting for R&D in four
advanced capitalist countries as an example;
Fogarty, Hussein, and Ketz (1994), in the US,
develop an approach based on power, ideology
and rhetoric; Klumpes (1994) analyses the politics
of rule development in the case of Australian pen-
sion fund accounting rule-making. Walker and
Robinson (1993) review this literature. Harrison
and McKinnon (1986) use change analysis to
reveal the attributes and essential properties of
regulation in a speci?c nation.
The political and economic consequences of
accounting have also come under consideration
(Solomons, 1978, p. 68; Solomons, 1983; Ze?,
1978, p. 60).
Social nature of accounting
It was several decades ago that accounting
ceased to be considered as a pure technique
and came to be seen as an instrument for social
management and change (Burchell, Clubb, Hop-
wood, Hughes, & Nahapiet, 1980; Hopwood,
1976, Preface; Puxty, Willmott, Cooper, & Lowe,
1987), i.e. a ‘‘social rather than a purely technical
phenomenon’’ (Burchell, Clubb, & Hopwood,
1985, p. 381). Hopwood (1976, p. 1), for exam-
ple, says ‘‘the purposes, processes and techniques
of accounting, its human, organizational and
social roles, and the way in which the resulting
information is used have never been static. (. . .)
They have evolved, and continue to evolve, in
relation to changes in the economic, social, tech-
nological and political environments of
organizations’’.
Harrison and McKinnon (1986, p. 233) point
out that ‘‘since the early 1970s, policy formulation
has been viewed as a social process; i.e. as the out-
come of complex interactions among parties inter-
ested in or a?ected by accounting standards’’.
They refer to Watts and Zimmerman (1978), Holt-
hausen and Leftwich (1983) and Kelly (1983). In
their work on value added in the United King-
dom, Burchell et al. (1985) review some existing
theories of the social nature of accounting and
conduct a social analysis. In the same vein, for
Burchell et al. (1980), ‘‘accounting change increas-
ingly emanates from the interplay between a series
of institutions which claim a broader social signif-
icance’’. Taking a di?erent approach (based on
Historical Materialism), Tinker, Merino, and
Neimark (1982) also argue that accounting is not
neutral and that accountants ‘‘have been unduly
in?uenced by one particular viewpoint on eco-
nomic thought (utility based, marginalist econom-
ics) with the result that accounting serves to
bolster particular interest groups in society’’
(p. 167).
As Burchell et al. say (1985, p. 381), ‘‘although
the relationship between accounting and society
has been posited frequently, it has been subjected
to little systematic analysis’’. We believe there is
still some room for further contributions in this
?eld. In this study, using goodwill as an example,
we try to illustrate how the rise of the shareholder
model has in?uenced accounting treatment.
This entire stream of literature emphasizes the
in?uence of the social context on accounting.
However, there could be a reverse e?ect: an in?u-
ence exerted by accounting on the general econ-
omy and social trends. The work by Burchell
et al. (1985, p. 381) already quoted above also
demonstrates that ‘‘accounting, in turn, also has
come to be more actively and explicitly recognized
as an instrument for social management and
change’’ (p. 381). One of their contributions is to
highlight the intermingling of accounting and the
social (p. 382). Tinker et al. (1982) also mention
this interrelation, although more brie?y, in stating
that accountants bear a responsibility ‘‘for shaping
subjective expectations which, in turn, a?ect deci-
sions [our emphasis] about resource allocation,
and the distribution of income between and within
social classes’’ (p. 188).
While Willmott et al. (1992)’s analysis concen-
trated on accounting, social and political regula-
tions, taking accounting for R&D as an example,
we will focus on accounting treatment and regula-
tions on goodwill. We will also attempt to build on
Burchell et al.’s work (1985) by showing the
reverse in?uence of accounting on the social where
goodwill is concerned.
Y. Ding et al. / Accounting, Organizations and Society 33 (2008) 718–755 721
Conceptual framework of analysis: stakeholder/
shareholder models, balance sheet theory and
goodwill
Our framework of analysis is based on the
stakeholder/shareholder models, which are associ-
ated with the balance sheet theory as applied to the
accounting treatment for goodwill.
Stakeholder/shareholder models
In this article, we enter the stakeholders vs.
shareholders debate (see, e.g., Driver & Thomson,
2002), taking the view that the evolution in regula-
tions governing treatment of goodwill can be
explained by the rise of the shareholder model
and ‘‘constellations of material and ideological
forces that are present within di?erent nations’’
(Puxty et al., 1987).
The origin of this dichotomy theory can be
traced back to the debate between Berle and Dodd
on corporate accountability (Macintosh, 1999).
During the 1930s, Berle and Dodd, two American
law professors, publicly debated the question ‘‘to
whom are corporations accountable?’’ (Berle,
1932; Dodd, 1932). Berle’s opinion was that the
management of a corporation could only be held
accountable to shareholders for their actions.
Dodd believed that corporations were accountable
to both their shareholders and the society in which
they operated. Macintosh (1999) suggests that this
debate ‘‘recognized in the absence of e?ective
stockholder control, that full disclosure of infor-
mation was the only e?ective means of ensuring
that management would act in the interests of
shareholders’’. Furthermore, the views reiterated
by Berle with Means, an economist, in The Mod-
ern Corporation and Private Property (Berle &
Means, 1932) are often considered as the begin-
nings of awareness of the corporate governance
problem, since their book contains the ?rst analy-
sis of the issue in terms of separation of ownership
and control (Baums, Buxbaum, & Hopt, 1994,
Preface).
In a more recent phenomenon, researchers
started to take an interest in the di?erences of own-
ership structure, and therefore corporate gover-
nance, between di?erent countries (see, e.g., Roe,
1994 for a comparison between the USA, Ger-
many and Japan).
These normative analyses on international dif-
ferences in corporate ownership were then vali-
dated by empirical evidence from a study by La
Porta, Lopez-de-Silances, and Shleifer (1999).
Analysing the ownership structures of the 20 larg-
est publicly traded ?rms in each of the 27 richest
economies, they ?nd that the United States com-
bines relatively high ownership dispersion with
good shareholder protection, a situation shared
with other rich common-law countries, while in
other countries, the ?rms studied are typically con-
trolled by families or the State.
Based on this law and ?nance literature, the
dichotomy between stakeholder and shareholder
models is often viewed by positive accounting
researchers as a clear-cut distinction between
Anglo-American (common-law countries) and
Continental European (code-law countries) busi-
ness environments, and used to show the superior-
ity of the American accounting model over those
in other countries, and argue that capital market
driven full disclosure is the only worthwhile devel-
opment model for accounting regulators in other
countries (Ball et al., 2000; Hope, 2003; Hung,
2001).
Ball et al. (2000) were among the pioneers of this
dichotomy between stakeholder and shareholder
models in the empirical accounting literature. They
refer to ‘‘the extent of political in?uence on
accounting’’, and then go on to say (2000, p. 3):
‘‘In code-law countries, the comparatively strong
political in?uence on accounting occurs at national
and ?rm levels. Governments establish and enforce
national accounting standards, typically with rep-
resentation from major political groups such as
labour unions, banks and business associations.
At the ?rm level, politicization typically leads to a
‘stakeholder’ governance model, involving agents
for major groups contracting with the ?rm. (. . .)
Under the ‘shareholder’ governance model that is
typical of common-law countries, shareholders
alone elect members of the governing board,
[and] pay-outs are less closely linked to current-per-
iod accounting income’’.
We believe this theoretical framework o?ers a
valuable basis for analysing the change in share-
722 Y. Ding et al. / Accounting, Organizations and Society 33 (2008) 718–755
holders’ attitude toward ?rms. But we argue that
at least two important dimensions are lacking in
the extant debate. For one thing, there is no such
clear-cut distinction in governance models between
Anglo-American and Continental European busi-
ness environments. Instead, in each country, we
observe a shift, albeit at varying paces, from the
stakeholder model to the shareholder model. This
evolution is con?rmed for Germany by Schilling
(2001, p. 150) who mentions that ‘‘shareholders’
interests play a much major role’’ and by Stoney
and Winstanley (2001, p. 618) who observe that
this country is ‘‘moving towards a more market-
based (. . .) approach’’. Our analysis should be seen
as part of a debate which has generated mixed, not
to say contradictory, results. While Letza, Sun,
and Kirkbride (2004, p. 252) advocate a paradig-
matic shift from the shareholder model to the
stakeholder model, Beaver (1999) questions the
validity of the stakeholder model. In between,
there is a developing body of literature bringing
out the idea of a possible convergence between
the two models to form a ‘‘hybrid’’ model (Je?ers,
2005; Ponssard, Plihon, & Zarlowski, 2005).
Even the literature referred to above (Ball et al.,
2000; Ball, Robin, & Wu, 2003; Ball & Shivaku-
mar, 2005), which clearly separates the two models
between common-law and code-law countries,
includes some arguments supporting observation
of a general move towards a shareholder model.
In this stream of literature, the shareholder model
is associated with a high level of conservatism
proxied as a high sensitivity of earnings to any
negative return on the ?rm’s share price. In vari-
ous countries, time-series empirical evidence
proves that this sensitivity is on an upward trend.
For example, Basu (1997) documents a steady
increase over the 30 years between the 1960s and
1990s in the sensitivity of earnings to negative
returns in the US. This evidence con?rms that even
in the US, the move towards a shareholder model
has been a gradual process. In countries consid-
ered as stakeholder-dominated, empirical evidence
also con?rms an increase in this sensitivity. Ball
et al. (2000) report that it increased signi?cantly
in France and Germany in the period 1990–1995.
Giner and Rees (2001) suggest that the phenome-
non, known as asymmetric conservatism, contin-
ued to increase during the period 1996–98 in
France, Germany and the UK. Basu (2001) uses
the development of capital markets in Europe to
explain this phenomenon. All this evidence indi-
cates that the distinction between the stakeholder
model and shareholder model is not so clear-cut
after all, and the development of the shareholder
model is closely tied up with the increasingly
important role of the capital markets.
The other neglected aspect in our opinion,
rather than seeking to validate or invalidate the
superiority of the American accounting model
(serving the interests of the shareholder model),
is that the major di?erence between the stake-
holder and shareholder models is the attitude
towards long-term/short-term pro?t. As the extant
literature shows, the stakeholder and shareholder
models diverge on three major points: ownership
structure, information asymmetry and the role of
capital markets. The di?erences between the two
governance models in all these three areas produce
a preference for long-term pro?t in the stakeholder
model but for short-term pro?t in the shareholder
model, as we demonstrate below.
In practice, the stakeholder and shareholder
models re?ect two di?erent types of relationship
between shareholders and ?rms. In the former,
ownership is often highly concentrated, with
shareholders being mainly the founder families,
the state, the bank or even employees, and actively
involved in management of the company. There is
less of an information asymmetry problem for
these stakeholders: they can relatively reliably
assess the company’s future prospects. The shares
of such a company are generally not very liquid
and it is not easy to transfer ownership. The share-
holders are therefore concerned with long-term
?nancial viability and economic performance.
Long-term contractual associations between the
?rm and stakeholders form one of the main pro-
posals for stakeholding management (Letza
et al., 2004, p. 243). In the shareholder model,
ownership is dispersed and shareholders are
separate from the ?rm’s management team, with
the result that owners of the company often have
very weak or no involvement in corporate deci-
sion-making. Besides, the sizeable physical and
mental distance between the management team
Y. Ding et al. / Accounting, Organizations and Society 33 (2008) 718–755 723
and shareholders considerably increases the level
of information asymmetry. The capital market
regulations (e.g. on anti-insider trading) limit their
information access to publicly available informa-
tion only. The shareholders have less visibility over
the ?rm’s future, and are thus more focused on its
(short-term) ?nancial performance. Furthermore,
the shareholder model is closely associated with a
highly developed (and therefore very liquid) capi-
tal market. In such a context, it is simple for share-
holders to transfer their shareholding to somebody
else, and this accentuates their short-term relation-
ship with their invested companies. This situation
is con?rmed, a contrario, by certain authors who
assert that the solution for improving corporate
governance is ‘‘to provide an environment in
which shareholders (particularly large and/or insti-
tutional shareholders) and managers are encour-
aged to share long-run performance horizons’’
(Letza et al., 2004, p. 245).
The long-term/short-term objectives divide is
not new. The same authors remind their readers
that the 19th century debate on corporate gover-
nance involved two major theories: the ‘‘inherent
property rights theory’’ (also called the ‘‘?ction
theory’’), which favoured pro?t maximization,
and the ‘‘social entity theory’’ (also called the
‘‘organic theory’’) which put more emphasis on
long-term growth (Letza et al., 2004, p. 248).
We observe that the role managers play has
changed dramatically in the last 100 years. In the
late 19th and early 20th centuries, most managers
were the owners of their companies (stakeholder
model). It was thus in their interest to preserve
the company’s long-term existence, and this was
also in the interest of the creditors. But in most
major companies nowadays, managers are
employees like any others. With their stock option
plans and other incentives, they act more like
short-term investors (shareholder model).
We believe that the shift from the stakeholder
model to the shareholder model is compatible with
the ‘‘business-systems’’ literature and the ‘‘com-
parative-business-systems approach’’ (Whitley,
1998, 1999a, 1999b). Business systems are con-
ceived as distinctive patterns of economic organi-
zation that vary in their degree and mode of
authoritative coordination of economic activities,
and in the organization of, and interconnections
between, owners, managers, experts, and other
employees (Whitley, 1999b, p. 33). Nation states
often develop distinctive business systems and
Whitley discusses the importance of state bound-
aries (1999b, pp. 44–45). However, while business
systems are related to countries, they evolve over
time, and Whitley (1999b, pp. 182–208) provides
evidence of changes in business systems in East
Asian capitalist countries (Japan, South Korea,
Taiwan). A few years later, Whitley (2005, p.
223) adds another idea: ‘‘the growing internation-
alization of investment and managerial coordina-
tion may weaken the national speci?city of
business systems’’. All these arguments, based on
the changes in dominant forms of economic orga-
nizations in market economies, can be transposed
to the countries included in our scope. Although
Whitley (2005, p. 223) limits his thought by refer-
ring to the ‘‘weakly institutionalized nature of the
international business environment at the global
level’’, we will demonstrate in Section ‘‘The four
historical phases of accounting for goodwill’’ that
as far as ?nancial accounting is concerned, the
international environment has had a major in?u-
ence on accounting for goodwill. In conclusion,
the concept of change in business systems rein-
forces the idea of evolution from one corporate
governance model (the stakeholder model, in our
study) to another (the shareholder model).
Balance sheet theory and goodwill
Continental European balance sheet theories
?rst appeared in the 19th century, in a context
marked by a clash of interests between creditors
and shareholders. From the introduction of the
French commercial code (Code de commerce) in
1807, and publication of comments on the code
(e.g., Delaporte, 1808, p. 122; Molinier, 1846, p.
194) until around 1870–1890, creditors and their
defenders in France and Germany successfully
imposed the ‘‘liquidation market value’’ as the
basis for accounting legislation and court rulings
(Richard, 2005a, 2005c). But towards 1870 in Ger-
many, certain lawyers defending the interests of
shareholders in large companies, particularly rail-
way companies, led a revolt against the accounting
724 Y. Ding et al. / Accounting, Organizations and Society 33 (2008) 718–755
concept of the Vermo¨ gensbilanz, or ‘‘liquidation
balance sheet’’. Based on the going concern con-
cept, they proposed a new type of balance sheet,
the Betriebsbilanz or ‘‘going concern balance
sheet’’ considered more capable of generating reg-
ular dividend distribution, where ?xed assets were
stated at (amortized) cost (Richard, 2005a, 2005c).
Von Strombeck (1878, p. 15), for example, argued
that ‘‘the distribution of dividends should be based
solely on going concern balance sheets, not liqui-
dation balance sheets, so as to avoid ?uctuations
in value’’.
A few years later, although he was also against
liquidation balance sheets and in favour of the
going concern principle, another German lawyer,
Simon (1886, p. 161), published what amounts to
a work of accounting theory with a new concept
of the balance sheet, based on statement of ?xed
assets at their subjective value in use (Gebrauchsw-
ert) for a given businessman, rather than at cost as
Von Strombeck recommended.
It can thus be considered that the three-faceted
continental European balance sheet theories and
the con?icting concepts of the balance sheet (liqui-
dation value, cost ‘‘value’’ and value in use)
emerged as early as 1886 (Richard, 2005b). This
theoretical framework was then advanced in Ger-
many by Schmalenbach (1919), who introduced a
new vocabulary, classifying the at-cost balance
sheet as ‘‘dynamic’’, as opposed to ‘‘static’’ liqui-
dation value or value in use balance sheets.
This two-way classi?cation and vocabulary are
still in use in Germany, particularly in the work
of Moxter (1984). In this paper, we use the repre-
sentation by Richard (1996), who opts for a three-
way classi?cation: the word ‘‘static’’ is reserved for
liquidation value balance sheets. Value in use bal-
ance sheets, which are very di?erent from ‘‘static’’
liquidation balance sheets, are given a speci?c
adjective, ‘‘actuarial’’.
Continental European balance sheet theories
were an important source of inspiration for Hat-
?eld, the ?rst great American accounting theorist,
who was well-versed in German culture (Richard,
2005b; Ze?, 2000). Afterwards, with the coming
of Paton’s era (Paton & Littleton, 1940; Paton,
1962; Paton & Stevenson, 1922), ‘‘Anglo-Saxon’’
authors lost sight of these theories. But for the
purpose of this article, they are particularly inter-
esting, since due to their historical origins (the
creditor-shareholder con?ict) they provide a sys-
tematic link between the typology and conception
of balance sheets and the evolution of the sociolog-
ical and political context, and relate to the stake-
holder/shareholder question that is the backdrop
to this study.
Fig. 1 summarizes the di?erent balance sheet
concepts, highlighting the terminology used by
the di?erent authors.
Schematically, the history of goodwill since the
1880s can be divided into four phases using a
typology inspired by the continental European
balance sheet theories discussed above (Richard,
2005b):
(1) The pure static phase ( ) (Richard, 1996, p.
31, 33): The term static (from Latin ‘‘stare’’,
to stop) is used to describe an accounting
theory which assumes that the balance sheet,
for the sake of creditor protection, shows liq-
uidation values (the resale value in a liquida-
tion process). It implies that goodwill is a
?ctitious 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 good-
will, applying a write-o? against equity.
(3) The dynamic phase ( ) (Richard, 1996, pp.
51, 61–62). Here, the underlying assumption
is no longer the liquidation of the company
but the going concern (dynamic) approach,
although goodwill is still assumed to have a
?nite life. This implies recognition of an
asset, with application of amortization over
a long period.
(4) The actuarial phase ( ): this corresponds to
the going concern assumption but without
the idea that goodwill can ‘‘die’’, leading to
recognition of an asset, with impairment test-
ing based on discounted (actuarial) cash
?ows.
1
1
We associate discounted cash ?ows with the term ‘‘actuar-
ial’’ in the same way as Bogle (1889, p. 693) and Guthrie (1883,
p. 6).
Y. Ding et al. / Accounting, Organizations and Society 33 (2008) 718–755 725
Stakeholder/shareholder models applied to goodwill
Stakeholder model
In a stakeholder model, shareholders are mainly
blockholders such as families, state, banks or
employees. Their presence is often a long-term
commitment, and exits are relatively rare. In this
situation, their main concern is protection and
the durability of the corporate assets, in line with
creditors of the ?rm. They are not therefore in
favour of recording goodwill as an asset, prefer-
ring to have it eliminated as soon as possible
(phase of the balance sheet theory). Walker sums
up their position very succinctly (1938a, p. 174).
The creditors, particularly banks, were su?-
ciently in?uential in the past to impose the write-
o? against equity solution (phase ). The opinion
of some actors in the early part of the 20th century
was expressed by Mac Kinsey and Meech (1923, p.
538): ‘‘Bankers and businessmen generally prefer a
balance sheet presenting only tangible assets to
one loaded with goodwill and other intangible val-
ues . . . in general, accumulated surplus should bear
its share’’. This opinion was echoed by Esquerre´
(1927, p. 41).
Shareholder model
The situation in the shareholder model is quite
di?erent. ‘‘Professional’’ shareholders or ‘‘rentier
investors’’ (to use an expression of Hannah
(1983, p. 57)), unlike family–owner shareholders,
are generally short-term oriented and expect
immediate, maximum pro?ts. Many accounting
historians have shown how, very often, creditors
and family–owners share an interest in conserva-
tive accounting (see notably Edwards, 1989; Lem-
Liquidation
balance sheet =>
Market value
Going concern
balance sheet
=> Value at cost
Actuarial balance
sheet
=> Value in use
Von Strombeck
(1878)
Simon (1886)
Schmalenbach
(1919), Moxter
(1984)
“Static” balance
sheet
“Dynamic”
balance sheet
Richard (1996) “Static” balance
sheet
“Dynamic”
balance sheet
“Actuarial”
balance sheet
“Pure static”
balance sheet
“Weakened static”
balance sheet
Concepts
Authors or promoters of the terminology
Delaporte (1808)
Molinier (1846)
This
paper
Fig. 1. Balance sheet theories – terminology.
726 Y. Ding et al. / Accounting, Organizations and Society 33 (2008) 718–755
archand, 1993, pp. 529–581). The di?erence
between the interests of professional shareholders
and other stakeholders goes a long way back, as
exempli?ed by Best’s (1885) remark: ‘‘shareholders
are very apt to take one point of view and creditors
and the outside public another’’. In theory, the dis-
appearance of the old conservative attitude
towards goodwill should be associated with a rise
in the in?uence of professional shareholders.
Total separation between ownership and man-
agement tends to work in favour of a non-amorti-
zation approach (phase ), after the amortization
approach (phase ), which could be seen as a com-
promise. More prosaically, it could be said that
shareholders will not stand for immediate or rapid
charging of goodwill against income. At the end of
the 19th century, a good many authors, including
supporters of immediate expensing/amortization,
were already aware that shareholders could ?nd
themselves deprived of dividends due to drastic
amortization of goodwill (see Guthrie, 1898, p.
429; Leake, 1914, p. 88; Matheson, 1884; More,
1891, p. 287).
Much more recently, the FASB itself (2001b, p.
3) acknowledged that ‘‘analysts and other users of
?nancial statements, as well as company manage-
ments, noted that intangible assets are an increas-
ingly important economic resource for many
entities (. . .) and that ?nancial statement users also
indicated that they did not regard goodwill amor-
tization expense as being useful information in
analysing investments’’. It went on (2001b, p. 5)
to reiterate the importance of ‘‘?nancial statement
users’’, saying they ‘‘will be better able to under-
stand the investments made in those [goodwill
and intangible] assets and the subsequent perfor-
mance of those investments’’ (our emphasis). The
accent is explicitly on performance measurement,
and ‘‘ability to assess future pro?tability and cash
?ows’’ (FASB, 2001b, p. 5).
The in?uence of the ?nancial markets is visible in
the same FASB Statement (2001b, p. 5), which con-
Stakeholder
influence
Shareholder
influence
Delayed
negative impact
on profit/equity
Non-capitalization
(expensing, or
amortization over a
short period)
Phase
Capitalization
without amortization
(but impairment
testing)
Phase
Capitalization with
amortization (over a
long period)
Phase
Non-capitalization
with write-off
against equity
Phase
Immediate
negative impact
on profit/equity
1
2
3
4
Fig. 2. Summary: Stakeholder/shareholder models, balance sheet theory and accounting for goodwill.
Y. Ding et al. / Accounting, Organizations and Society 33 (2008) 718–755 727
cludes that ‘‘amortization of goodwill was not con-
sistent with the concept of representational faithful-
ness, as discussed in FASBConcepts Statement No.
2’’ (FASB, 1980). It may sound surprising that it
took more than 20 years to realize this inconsis-
tency, but the FASB does explicitly link the reform
to ‘‘the increase in merger and acquisition activity
that brought greater attention to the fact that two
transactions that are economically similar may be
accounted for by di?erent methods that produce
dramatically di?erent ?nancial statement results’’
[the pooling-of-interests method and purchase
method] (FASB, 2001b, Appendix 1, p. 5).
In our opinion, the capital markets’ in?uence,
and therefore the importance of the shareholder
model, is also re?ected in the notion of interna-
tional pressure, or the desire for international com-
parability which is sometimes mentioned (Bryer,
1995, p. 305). The growing role of the capital mar-
kets is also due to the ever-increasing signi?cance
of goodwill in corporate accounts (Higson, 1998).
Fig. 2 summarizes the results of our analysis on
the relationship between the shift from a stake-
holder model to a shareholder model and account-
ing regulations for goodwill.
Fig. 2 shows that the shift from the stakeholder
model to a shareholder model (from long-term to
short-term pro?t orientation) is progressive, and
corresponds to the four phases of the balance sheet
theory described above which, in turn, can be
related to goodwill treatment.
The four historical phases of accounting for goodwill
The move from the stakeholder model to the
shareholder model resulted in changes in the regu-
lations a?ecting goodwill treatment over the per-
iod examined. However, the four countries
studied went through the same phases but at di?er-
ent times.
Fig. 3 summarizes the four phases in the evolu-
tion of accounting for goodwill in the four coun-
tries studied.
We do not include the IASC/IASB as a separate
entity in our detailed analysis as the in?uence of its
standard-setting on other countries has only been
seen recently, i.e. in the late nineties with the trend
for reducing the number of options (Walton, Hal-
ler, & Ra?ournier, 2003, p. 13).
2
Phase 1: The static phase (non-recognition phase)
Great Britain (1880–1897)
As emphasized by Dicksee and Tillyard (1920,
p. 70), right up until 1900 the law and court rulings
played a practically non-existent role in the treat-
ment of goodwill in Great Britain. It is thus impor-
tant to ?nd out what practices most British
accountants recommended.
In this phase, running from 1880 to about 1900,
the dominant doctrine considered that goodwill
was not a true asset, and should be immediately,
or at least rapidly, expensed. The best proof of
the widespread refusal to consider goodwill as an
asset is in the writings of Gundry, one of the few
authors in favour of seeing it as a ‘‘valuable asset’’
(1902, p. 663). Gundry, quoting Dicksee (1897)
complains of ‘‘the general denouncement and dep-
recation of the term as an asset’’ (1902, p. 663).
The argument that goodwill would have no
value in a bankruptcy situation was taken up by
lawyers, such as Roby (1892, p. 293) and some
accountants, including Knox (in Guthrie, 1898,
p. 430), Stacey (1888, p. 605) and the author of a
leading article in Time in 1905 (quoted by Dicksee
& Tillyard, 1920, p. 99). It is thus hardly surprising
that a large number of accountants were in favour
of immediately or rapidly writing o? goodwill
against pro?ts (Bourne, 1888, p. 604; Matheson,
1884; More, 1891, p. 286; Roby, 1892, p. 293; see
also Knox in Guthrie, 1898, p. 430).
2
For the sake of completeness, we will simply observe that
the international accounting standard ‘‘Accounting for business
combinations’’ (IASC, 1983) was adopted for the ?rst time in
1983. Under paragraphs 39–42, several options were possible:
(1) recognition as an asset and amortization over the useful life;
(2) immediate reduction of earnings or (3) write-o? against
equity. These solutions correspond to our ?rst three phases
(static, weakened static and dynamic). This standard was
revised in 1993, and the ?rst two options were removed:
goodwill had to be amortized over its useful life. This useful life
was not to exceed 5 years unless a longer period, not exceeding
20 years, could be justi?ed (IASC, 1993, Sections 40 & 42). Only
IFRS 3 (IASB, 2004b), which is mentioned in the body of the
article, had any real in?uence on three of our studied countries
(i.e. Great Britain, France and Germany).
728 Y. Ding et al. / Accounting, Organizations and Society 33 (2008) 718–755
Our conclusion from all this information is that
the immediate expensing or rapid amortization
approach, against current pro?ts, was the stan-
dard practice up until 1900–1905. Globally speak-
ing, this prudent accounting approach comes as
no surprise: it is in line with the social and eco-
nomic context of the period (Hoppit, 1987, p.
16; Parker, 1965, p. 160) where the stakeholder
model was clearly the norm for corporate
governance.
Germany
Pure
static phase
Dynamic
phase
Weakened
static
phase
1880
1900
1917
1970
1982
1985
1990
2001
Actuarial
phase
2005
Great Britain
US
France
2000
1
2
3 4
Fig. 3. Summary: The four phases of accounting treatment of goodwill.
Y. Ding et al. / Accounting, Organizations and Society 33 (2008) 718–755 729
In contrast to the German situation (see below),
there was strong opposition in Great Britain to the
dominant purely static doctrine, ranging over sev-
eral distinct views. For simplicity’s sake, we iden-
tify the two main views.
The ?rst, more widely held view concerned pro-
ponents of the dynamic approach (which corre-
sponds to our phase ) (see Guthrie, 1898, p.
429). The second, and at the time the only credible
alternative to the purely static approach, rallied
authors who (also) proposed that goodwill should
disappear from the accounts immediately, but by
charging to equity (phase ). This was the position
of writers such as Dicksee (1897), whose later
in?uence was to be fundamental (see below).
United States (1880–1897)
Throughout this period, the US economy was
also dominated by the stakeholder model. Good-
will was not therefore considered as a true asset
and was theoretically to be deducted from reve-
nues. There was no regulation during this phase,
but British writings and practices were very in?uen-
tial (Hughes, 1982, p. 24), and the situation appears
to have been the same as in Great Britain. Symp-
tomatically, the authors of one study of changes
in the treatment of goodwill took their opinions
from Harris (1884, p. 11) and assert that prior to
the late 19th century, ‘‘accountants appeared in
substantial agreement that amounts expended for
goodwill should not be carried very long in the bal-
ance sheet’’ (Catlett & Olson, 1968, p. 38).
Knight (1908, p. 197) speaks of goodwill as an
‘‘uncertain value’’ and deems that ‘‘the best course
is to dispose of such an account through a charge
to depreciation’’, with writing o? ‘‘encouraged’’.
Germany (1880–1985)
Germany
3
was the country with by far the lon-
gest initial phase: from 1880 to 1985. Prior to 1931,
no law made any reference to treatment of good-
will, leaving only doctrine and court rulings as
our sources. The German lawmakers of the time,
under the in?uence of Napoleonic lawyers,
adopted a static view of accounting: no item could
be recognized as an asset unless it would have an
individual market value in the event the company
ceased to exist, i.e. went bankrupt. As a result of
this doctrine most intangibles, particularly good-
will, that were not separable from the company
and had no individual market value, had to be
expensed immediately. This was to be the domi-
nant practice for a great many years.
The only major voices raised in favour of recog-
nizing acquired goodwill came from early support-
ers of the dynamic doctrine such as Simon and
Fischer (Greve, 1933, p. 22). Only a few authors
dared to propose recognition of goodwill followed
by amortization over more than 5 years (Take,
1939, p. 116). Among the main proponents of this
approach were Schmalenbach (1949), Mu¨ ller
(1915), Schreier (1928), Stern (1907), and Schmidt
(1927) (on these authors, see Greve, 1933, p. 32;
Take, 1939, pp. 111–112), all of whom were in
favour of long-term, systematic amortization.
The ?rst German law concerning goodwill was
an emergency law of July 19, 1931. It added a
new article to the Commercial Code (article 261)
allowing acquired goodwill to be recognized as
such only on condition it was then amortized by
‘‘appropriate annual amortization charges’’.
According to Greve (1933, p. 35) and Take
(1939, p. 116), this law simply gave formal expres-
sion to the dominant doctrine of the time.
The measures introduced in 1931 were included
without amendment in the law (AktG) of 1937
(article 133, paragraph 5), and then almost without
amendment in the law (AktG) of 1965 (article 153,
paragraph 5). The only noteworthy di?erence is
that in 1965, the law stipulated that the systematic
amortization against goodwill entered as an asset
must be at least one-?fth annually. This remained
applicable until 1985.
This exceptionally long static phase in Germany
is consistent with the country’s strong stakeholder
model. For example, Roe (1994, p. 1936) docu-
mented that ‘‘CEOs at many large German com-
panies face a small group of institutional voting
3
Although the country ‘‘Germany’’ did not exist as such at
the beginning of the period under study, the following
discussions apply to Prussia and the other German states,
because after the Nu¨ rnberg conference (1857), a commercial
code common to all German states (‘‘Allgemeines Deutsches
Handelsgesetzbuch’’ – ADHGB) was established as early as
1861 (Oberbrinkmann, 1990, p. 33).
730 Y. Ding et al. / Accounting, Organizations and Society 33 (2008) 718–755
blocks that controls nearly half of the stock
voted’’.
France (1880–1917)
Re?ecting the decisive in?uence of family own-
ers and creditors (stakeholder model), the ?rst
phase in France was dominated by the purely sta-
tic approach in both doctrine and case law: good-
will was not considered a true asset and was to be
expensed immediately, or at the very least amor-
tized rapidly.
In the 1880s, authors such as Didier (1885) with
his ‘‘strict’’ balance sheet, Courcelle-Seneuil (1872)
and Vavasseur (1868), who stressed the di?culty
of realizing ?xed assets (in Verley, 1906, p. 121),
recommended that assets, including goodwill,
should be carried at liquidation value. To this
way of thinking, a ‘‘good’’ asset was one with
totally amortized goodwill.
In the 1900s, most authors such as Kopf (1904,
p. 27), Verley (1906, p. 39), Didier (1885) and Ami-
aud (1920, p. 6) also insisted that acquired good-
will was not a real asset. While they accepted
recognition of this ‘‘?ctitious’’ asset, rapid amorti-
zation (generally total amortization within less
than 5 years) or a similar solution was required.
The dynamic approach of long-term amortiza-
tion was only supported by Magnin (1912), whose
writings, inspired by the German dynamic school,
were ?ercely criticized by most other authors. The
only other real resistance to the static view came
from French followers of the famous German law-
yer Simon, principally Duplessis (1903) and above
all Charpentier (1906), who were in favour of
goodwill remaining in the balance sheet at its
acquisition value, unless a fall in its ‘‘useful’’ value
could be proved. This is in e?ect a conservative
version of the actuarial approach.
Phase 2: the weakened static phase (excluding
France)
This phase is identi?able in all the countries
except France. Unlike Great Britain and the US
where accounting law is independent of tax law,
from 1917 the situation in France was dominated
by tax concerns, which prevented the kind of
change seen elsewhere. While the tax rule in the
other countries was similar to the French rule of
recognition without amortization, its in?uence
was not as great as in France. France will therefore
be examined in a separate section ‘‘Phase 2 in
France: the ?scal approach (1917–1982)’’. France
was to return to a ‘‘normal’’ situation as domestic
tax in?uence declined and international in?uence
increased.
Great Britain (1897–1990)
During this phase, since their immediate nega-
tive impacts on income harm dividend distribu-
tion, the purely static approaches (immediate
expensing or rapid amortization against the year’s
pro?ts) increasingly fell from favour, while a
weakened static approach involving charging
goodwill to equity became more popular. The
demise of the immediate expensing or rapid amor-
tization practice is visible from the work of in?u-
ential authors of the ?rst half of the 20th
century: Dicksee (1897), Garke and Fells (1922)
and Lancaster (1927) all reject the practice of
quick ‘‘writing down’’ against income. The domi-
nant solution was to make goodwill disappear by
charging it to equity, a practice that combines
the basic static approach – goodwill is not an asset
– with the possibility of dividend distribution,
based on current pro?t. The shareholder model
was growing in importance.
The idea of charging goodwill to equity came
from the leading author for the second half of
the 19th century, Dicksee (1897). This ‘‘king’’ of
British accounting was caught between two con-
?icting views:
– in?uenced by the static doctrine of the time, he
accepted that goodwill is an asset of ‘‘arbitrary’’
value (1897, p. 45) that can be considered equiv-
alent in nature to ‘‘Establishment expenses’’
(1897, p. 46) and must be treated with ‘‘the
greatest caution’’ (1897, p. 46). He arrived at
the conclusion that this asset should be elimi-
nated ‘‘with all due speed’’ (1897, pp. 45–46);
– on the other hand, he also had shareholder’s
interests in mind, and believed that goodwill
‘‘should not be written o? out of pro?ts’’
(1897, p. 46) because that is equivalent to creat-
ing ‘‘a secret reserve’’ (1897, p. 47).
Y. Ding et al. / Accounting, Organizations and Society 33 (2008) 718–755 731
Failing to ?nd an optimum solution, Dicksee
(1897), in agreement with Tillyard (1920, p. 106),
appears to have ?nally accepted that acquired
goodwill should be charged to reserves, particu-
larly if the goodwill was arti?cially in?ated. As in
the previous period, many authors such as Hamil-
ton (1914, p. 218), Lancaster (1927, p. 146) and
Garke and Fells (1922) were drawn to this view
for practical reasons.
This weakened static solution remained the
standard approach in the UK until the end of
the 1980s. Apart from reference to the in?uence
of the dominant doctrine, one important fact sup-
ports this statement: despite an attempt to change
the situation (a discussion paper dated 1980 with
a proposal for capitalization and systematic amor-
tization), at no time were the British lawmakers in
a position to impose a solution contrary to the
dominant practice (Paterson, 2002b). Further-
more, SSAP 22 (ASC, 1984, revised in 1989) still
allowed goodwill to be written o? immediately
against reserves while o?ering an alternative
treatment consisting of capitalization and amorti-
zation against future pro?ts over its ‘‘useful eco-
nomic life’’. The ?rst treatment was adopted
almost universally (Arnold et al., 1994; Peasnell,
1996).
In our opinion, the weakened static solution is
e?ectively a ‘‘convenient’’ variant of the purely
static approach. Its aim is not to make goodwill
an asset, but to make it disappear ‘‘softly,
softly’’. Our view appears to correspond to the
position defended in Great Britain (Holgate,
1990, p. 11).
US (1897–1970)
As in Great Britain, the static approach still
dominated in the United States during this period,
the basic view being that goodwill was not a real
asset and should be made to disappear as soon
as possible. However, rather than being charged
to expenses, goodwill was increasingly charged
against equity, and so the weakened static
approach began to predominate as it did in Eng-
land. On the theoretical aspect, Dicksee’s ideas
were widely echoed in the United States, where
many authors favoured the solution of an immedi-
ate write-o? against retained earnings or capital
surplus (Kester, 1922, p. 419; Lincoln, 1923; Mac
Kinsey & Meech, 1923, p. 538).
This philosophy was also re?ected in the ?rst
US regulations. In 1917, a memorandum entitled
‘‘Uniform Accounting’’ issued by the American
Institute of Accountants (predecessor to the Amer-
ican Institute of Certi?ed Public Accountants) was
accepted by the Federal Trade Commission and
Federal Reserve Board, for application by compa-
nies wishing to obtain a loan. It recommends that
goodwill should be ‘‘shown as a deduction from
net worth’’ (AIA, 1917). While this treatment
was only compulsory for ?nancial statements pro-
duced for the purposes of a loan, it still reveals the
state of mind at the time.
There was also an increasing trend towards rec-
ommending recording goodwill at cost, followed
by systematic amortization over its useful life or
the period referred to for discounting to present
value (Gilman, 1916, p. 195; Hat?eld, 1918, p.
117; Hat?eld, 1927; Paton & Littleton, 1940, p.
92; Paton & Stevenson, 1922, p. 531; Yang, 1927,
p. 196). Others were in favour of recognition at
cost with no systematic amortization (Bliss, 1924,
p. 350; Dickinson, 1917, pp. 79–80; Esquerre´,
1927, p. 130; Freeman, 1921, p. 263).
A signi?cant event of this period was the serious
1929 economic crisis in American industry, which
had several consequences in terms of treatment
of goodwill. Its main impact was to reinforce the
positions of those who saw goodwill as an unsta-
ble, if not undesirable, item (Walker, 1938b, p.
259).
Germany (1985–2000)
The main di?culty in analysis of this period lies
in the fact that Germany introduced all European
accounting directives into its national regulations
at the same time, and reformed regulations gov-
erning both individual and consolidated accounts,
with di?erent solutions for goodwill. This change
also coincided with the development of the Ger-
man capital market.
Individual accounts. The German law of 1985,
which incorporated the fourth EU directive into
German regulations, includes a paragraph 255
with three sections on the treatment of goodwill
732 Y. Ding et al. / Accounting, Organizations and Society 33 (2008) 718–755
in individual ?nancial statements: (1) Section 1:
goodwill may be capitalized if it has been acquired;
(2) Section 2: if goodwill is capitalized, it must be
amortized each subsequent year by at least 25%;
(3) Section 3: the amortization may, however,
‘‘also be distributed systematically over the years
which are likely to bene?t’’ (see Ballwieser, 1996).
A ?rst look at this rather indecisive text can
lead to the following conclusions: the law does
not impose treatment of goodwill as an asset,
and allows (as before) immediate expensing of
the corresponding disbursements. It can be even
asserted that the ‘‘expense solution’’ remains the
normal solution (Duhr, 2003; Ku¨ ting, 1997, p.
49), as Section 2 requires on principle that if the
goodwill is capitalized, rapid amortization must
be applied over a period of less than 5 years. This
basic solution is explained, according to the doc-
trine, by the traditional conservatism principle
(Duhr, 2003, p. 973; Ellrott, 2003, margin note
245; Walz, 1999, margin note 82).
But Section 3 sheds some doubt on the ‘‘sound-
ness’’ of the basic solution: for the ?rst time in the
history of Germany, an o?cial text allows treat-
ment of goodwill according to the dynamic
approach, with capitalization and amortization
over its full period of use.
Unsurprisingly given this ambiguity, which some
specialists considered totally illogical (Busse von
Colbe & Ordelheide, 1993, p. 234; Ku¨ ting, 2000,
p. 102), the German doctrine is hesitant as to the
nature of goodwill in individual accounts. It seems
that the majority of German authors (see namely
Baetge, Kirsch, & Thiele, 2002, p. 262; Busse von
Colbe, 1986, p. 87; Fo¨ rschle, 1995, margin note 7;
Fo¨ rschle & Kropp, 1986, p. 155; Ku¨ ting, 1997, p.
461; Ludz, 1997, p. 70; So¨ ?ng, 1988, p. 599; Weber
& Zu¨ ndorf, 1989, p. 334) consider that neither the
text of the law, nor the nature of goodwill (which
is neither individually resalable nor individually
valuable, and represents anticipated bene?ts) can
confer on goodwill the status of a true asset. For a
good number of these authors, goodwill, if capital-
ized, is only a ‘‘balance sheet-help’’ (‘‘Bila-
nzierungshilfe’’, an item which can in exceptional
cases be recorded in the balance sheet, although it
is not an asset), i.e. (in our own interpretation) a ?c-
titious ‘‘asset’’ to be got rid of as rapidly as possible.
It can be concluded at this stage that although,
from a regulation standpoint, the dynamic solu-
tion was beginning to break through (an undeni-
ably new development in the German context),
the basic solution, as con?rmed by the predomi-
nant doctrine, remained the classic static concep-
tion. But this view must be cross-checked against
the practices allowed for consolidated accounts.
Consolidated accounts. The treatment of goodwill
in consolidated accounts is codi?ed by article
309-1 of the German Commercial Code. This arti-
cle displays two fundamental oddities in compari-
son with its counterpart for individual accounts.
The ?rst, which necessarily derives from the
European text, is that, as a matter of principle,
goodwill must be (not may be) capitalized (article
309-1, Section 1). The di?erent wording initially
appears to indicate a di?erent treatment compared
to individual accounts. But there is a second odd-
ity: the fact that the German legislator has used the
?exibility of article 30 Section 2 of the seventh EC
directive, which allows member states to authorize
companies to write-o? goodwill against equity.
Many German authors who recommend unifying
the rules between corporate and consolidated
accounts, notably Busse von Colbe and Ordelheide
(1993, p. 233) and Ku¨ ting (1997, p. 455), refer to
Niehus (1986, p. 239) in underlining that this ?ex-
ibility results from a request by Great Britain, and
constitutes an ‘‘error’’. Whether or not this is true,
this ‘‘error’’ has been legalized by the German leg-
islator, who was under no obligation to do so.
Article 309-1 paragraph 3 allows German groups
to write o? goodwill against consolidated retained
earnings (but unlike the seventh directive, without
specifying that the write-o? must be immediate).
To complete the scene, the German legislator has
integrated other solutions allowed for individual
accounts into the regulations for consolidated
accounts: rapid amortization over a maximum of
5 years (paragraph 1) and amortization over the
useful life (paragraph 2).
In terms of actual practices, the studies
described by Busse von Colbe and Ordelheide
(1993, p. 234, note 31) and Ku¨ ting (2000) show
that there was a real craze among German groups
for the weakened static solution.
Y. Ding et al. / Accounting, Organizations and Society 33 (2008) 718–755 733
All this evidence makes it reasonable to state
that due to the decisive importance of consoli-
dated accounts, the 1985–2000 period in Germany
was mainly dominated by the weakened static
solution.
Phase 2 in France: the ?scal approach (1917–1982)
From 1917, the tax administration began to
intervene on the French accounting scene. Its the-
ory of how goodwill should be treated was to have
great in?uence on commercial doctrine and regula-
tions. This phenomenon was unique in the four
countries studied and lasted more than 60 years,
from 1917 to 1982.
The new doctrine of the French tax administration
for individual accounts
To begin with, when the ?rst major French law
on income taxes (the law of July 31, 1917) was
enacted, the tax view was not openly hostile to
the static approach. Article 4 of the law simply sta-
ted that taxable pro?t was the amount after deduc-
tion of all expenses, including ‘‘amortization
generally accepted in the practices of each type
of industry’’. But subsequently, no doubt for bud-
getary reasons (Prospert, 1934, p. 71), the tax
administration, in an instruction of March 30,
1918, refused all systematic (and a fortiori rapid)
amortization of goodwill (Brie`re, 1934, p. 181).
Despite some changes between 1918 and 1928,
the French tax administration’s position remained
almost constantly as follows practically from 1928
to the modern day: (1) goodwill is an asset (but
start-up costs are not); (2) goodwill cannot be sys-
tematically amortized; (3) goodwill can be reduced
in exceptional circumstances.
The in?uence of the tax administration’s position on
French accounting regulations
Its in?uence was considerable. As early as 1944,
Dalsace (1944, p. 142) was complaining about peo-
ple ‘‘giving in’’ to the tax administration’s ideas
and pointed out that ‘‘all ?nancial or ?scal consid-
erations should be independent of asset valuation
and amortization’’. A few years later, an essay
was published entitled ‘‘the hijacking of account-
ing by taxation’’ (Rives, 1962).
As regards goodwill, this hijacking was obvious
from 1947. From the ?rst French General
Accounting Plan (Plan comptable ge´ ne´ ral) (CNC,
1947, pp. 79–81) it is clear that tax (i.e. actuarial)
concerns had got the better of static and dynamic
approaches: there is no (systematic) amortization
account for goodwill, merely a provision account
(but no indication of how it should be used). The
situation was unchanged 10 years later when the
1957 General Accounting Plan was issued (Poujol,
1965, p. 96), and continued until 1982.
In order to guarantee tax income, the French
taxation system acted exactly like a short-term-ori-
ented investor, obliging ?rms to maximize their
current income to the detriment of future earnings.
France’s acceptance of the tax administration’s
position disallowing systematic amortization of
goodwill should not be taken to mean that France
was more ‘‘advanced’’ than other countries; on the
contrary, it is the sign of a delay in its development
towards stock market capitalism.
The case of consolidated accounts
The above remarks concerned individual
accounts. In the case of consolidated accounts,
the situation in France also displayed a peculiar-
ity compared to the other countries. Up to 1985,
no strict obligation to establish consolidated
accounts applied to French groups. During the
whole period 1917–1982 the only French regula-
tion that groups wishing to establish consolidated
accounts could refer to was a CNC (Conseil
National de la Comptabilite´ – National Accoun-
tancy Council) report published in 1968 (CNC,
1968) and revised in 1978, but with no legal
enforceability, which proposed that goodwill (at
that time called ‘‘Prime d’acquisition des titres de
participation’’ – ‘‘Acquisition premium on long-
term investments’’) should be maintained without
change in the consolidated balance sheet (with no
systematic amortization), ‘‘unless special circum-
stances justify reducing its value by constitution
of a provision for impairment’’ (CNC, 1978, Sec-
tion 4102a). This solution visibly remained in line
with the tax and accounting doctrines prevailing
at that time for individual accounts, but as it
had no legal value, groups were not obliged to
follow this framework.
734 Y. Ding et al. / Accounting, Organizations and Society 33 (2008) 718–755
Some studies, however, seem to show that even
in this period, a few French groups were beginning
to follow the lead of the most ‘‘modern’’ American
rules. For instance, Pe´chiney amortized its good-
will over 10 years in 1969 and 40 years in 1973
(Bensadon, 2002, p. 58). It was thus a time of con-
?ict between what French regulations allowed and
what French groups wanted.
Phase 3: the dynamic phase
United States: the dynamic position comes out on
top (1970–2001)
In the period 1940–1970, three main phenom-
ena were visible on the American scene: the doc-
trine and practice of writing o? goodwill was in
decline, the dynamic doctrine and practice began
to take over, and there was still some resistance
to doctrines and practices that wanted goodwill
to have no impact on pro?t.
The decline of the write-o?. In the doctrine, this
decline is clear, at least from around 1945 to
1970. The leading author of accounting literature
at the time was the renowned Paton (1962), who
like other authors such as Walker (1953), Kripke
(1961), Hylton (1964, 1966) and Wol? (1967, p.
258), was in favour of dynamic approaches and
against goodwill write-o?s. His opponents were
only minor authors, often practitioners such as
Catlett and Olson (1968), and Spacek (1973).
The decline is just as obvious in the regulations
(AAA, 1948, p. 340; AIA, 1953, pp. 39–40). The
AIA’s basic position was that acquired goodwill
should be systematically amortized by reduction
of current income. But write-o?s were still allowed.
A decisive attack on this stand came in 1966 in the
form of APB Opinion No. 9 concerning prior-per-
iod adjustments. This argued that write-o?s should
in principle be charged against current income.
The decline of the write-o? was equally strong in
practice (Hughes, 1982, p. 156). The reasons for the
declining popularity of the practice are not clear
(see Kripke, 1961, p. 1029, note 3; Spacek, 1973),
but apparently concern the aim to avoid (1) elimi-
nation of reserves that were useful for dividend dis-
tribution; (2) a sudden impact on reserves and (3)
reduction of the ?nancial surface of the ?rm.
The rise to dominance of the dynamic approach. The
move towards the dynamic approach happened
slowly. It probably began in the 1930s, a period
of serious economic depression when businesses
tried to reassure shareholders by providing a
‘‘smoothed’’ (to apply a modern term) presenta-
tion of income. But in a context of economic crisis,
with conservative approaches still very strong at
the time (Kripke, 1961, p. 1032), it was too early
for full application of this ‘‘new’’ doctrine, at least
for goodwill. It was only in the 1960s and 1970s
that the dynamic doctrine came to dominate in
treatment of goodwill, at a time when stock mar-
kets were sluggish, demonstrating that creditor
protection was no longer a concern of the state
(decline of the stakeholder model).
Although it was not absolute, this domination
is clear in both regulations and practices. In terms
of regulations, the main o?cial document re?ect-
ing the domination of dynamic practices is APB
Opinion No. 17 of 1970, which stipulates that
goodwill must be ‘‘amortized by systematic
expenses over a certain period’’. This e?ectively
cancelled out the options left open by ARB 43
chapter 5, which had favoured write-o?s.
Continued opposition. It is always di?cult to satisfy
all companies, as they all operate in di?erent con-
ditions. APB 17 was adopted by 13 votes for over 5
against, indicating signi?cant ‘‘resistance’’ to the
dynamic approaches.
Resistance from the weakened static view
For some companies, busy around 1970 with
massive mergers on a scale the United States had
never seen before, the prospect of having to amor-
tize enormous amounts of goodwill – even over
40 years – was problematic. The regular reduction
in income that would result was felt to be a less
satisfactory solution than a reduction in reserves
or equity (Catlett & Olson, 1968; see also Colley
& Volkan, 1988, p. 41; Miller, 1973, p. 280, 291).
Pooling of interests
In parallel to the ‘‘doctrinal resistance’’, pres-
sure was put on members of the APB, with a cer-
tain degree of success. The result was a ‘‘modern’’
and ‘‘bene?cial’’ version of the static solution:
pooling of interests. Until 1950, the only business
combination method that existed was the purchase
Y. Ding et al. / Accounting, Organizations and Society 33 (2008) 718–755 735
accounting method (Catlett & Olson, 1968, p. 45).
Pooling of interests was ‘‘discovered’’ in 1950 with
ARB 40 (AIA, 1950), but was not of great interest
until 1957 because the write-o? method was nei-
ther yet discredited nor prohibited. But starting
from 1957, in a high-in?ation context that saw
goodwill values shoot up, pooling began to play
a strategic role for companies who were reluctant
to amortize and wished to carry on using practices
similar to write-o?s (Catlett & Olson, 1968, pp. 3–
4). Throughout this period there was great pres-
sure to broaden the criteria for application of the
pooling of interests method. The struggle was
not yet over: in 1969, the APB considered prohib-
iting pooling in a political environment calling for
checks on mergers, seen as bad for national
employment (Spacek, 1972). Prominent authors
like Brilo? (1967, 1968) and Brilo? and Engler
(1979) sharply criticized what they called ‘‘dirty
pooling’’. But once again, under pressure from
businesses the APB backed down.
4
In the end, the pooling of interests method
could be used by any group undertaking a merger
by exchange of stock. While this meant that the
write-o? technique was no longer as widely
accepted as in the previous period, it remained
possible to use it in a particularly favourable form
(elimination of goodwill with no impact on
reserves) for some merger transactions.
Resistance by the actuarial view
As Hughes (1982) pointed out, there are few ref-
erences to the actuarial doctrine in publications
over the period 1958–1980. Only a few authors,
like Knortz (1970), and especially May (1943,
1957), quoted in Catlett and Olson, 1968, pp. 88–
89 and Gynther (1969), dared to speak openly in
defence of this approach.
After 1972, the dynamic doctrine took over, but
the desire to use the actuarial approach remained
at the back of the minds of a good many US busi-
nesses. This fact is important to fully understand
the current situation.
France (1982–2005)
After a period of more than 60 years’ ‘‘stagna-
tion’’ in France, this phase brought sudden signs
of a clear change in treatment of goodwill, and
the dynamic approach became more popular.
The ?rst sign came in the third postwar o?cial
General Accounting Plan issued in 1982. This rein-
troduced a goodwill amortization account, and
stated that ‘‘intangible items making up goodwill
do not necessarily bene?t from legal protection
that confers a certain value’’ (CNC, 1982, p.
120). Thus a degree of incentive for amortization
for accounting (rather than tax) purposes
appeared.
The move towards the dynamic approach was
con?rmed by the regulations governing consoli-
dated accounts. Decree 67–236 on companies,
amended following the law of 1985 on consoli-
dated ?nancial statements, ruled that unallocated
goodwill arising on ?rst consolidation ‘‘must be
included in income over a period of amortization’’,
while regulation 99-02, paragraph 21130 of 1999,
stated that ‘‘the amortization period must. . .
re?ect the assumptions used and objectives evi-
denced at the time of acquisition’’.
It is true that even the regulations used the ?ex-
ibility allowed by the seventh directive, and intro-
duced the possibility for French groups to write o?
goodwill against reserves. But contrary to its Ger-
man counterpart, the French regulator decreed
that this write-o? could only happen ‘‘in excep-
tional circumstances duly justi?ed in the notes’’
(Decree of March 23, 1967 modi?ed in 1986, Sec-
tion 248-3). Clearly, the aim was to restrain the use
of the weakened static approach in favour of the
dynamic view.
The last issue deserving our attention is pooling.
At the beginning of the period, the method was
totally absent from French regulations. It was only
in 1999 that the French regulator, not wishing to
‘‘disadvantage’’ French groups, decided to intro-
duce this treatment of goodwill into French regu-
lations (CRC, 1999, Section 215). But pooling
was rarely used for two main reasons. First, it
4
Interestingly, after the adoption of SFAS 141 and 142,
Brilo?, in an interview, criticized the new rule because of the
leeway it gives management for determining when goodwill has
become impaired. Brilo? even stated that he had ‘‘laboured for
30 years to get rid of pooling accounting and [was] sorry [he]
did’’ (interview given to the AIMR’s The Financial Journalist
E-Newsletter for January 2002 –http://www.newswise.com/
articles/view/?id=FJJAN.IMR).
736 Y. Ding et al. / Accounting, Organizations and Society 33 (2008) 718–755
was allowed as an exception, subject to strict con-
ditions. Second, and probably more importantly, it
appeared on the French scene not long before the
regulator announced plans to put an end to its use.
The ?nal question is why most French compa-
nies (with enough in?uence to achieve substantial
change in the regulations) wanted to adopt a
dynamic approach. The main reason for the move
towards a dynamic approach was, we believe, a
process of imitation: in order to build an interna-
tional reputation, large French companies had to
comply with US and/or international rules, i.e.
rules which at the time favoured the dynamic treat-
ment of goodwill (IASC, 1993). The third
‘‘French’’ phase was in fact an international phase
dictated by the dominant accounting solutions of
the worldwide shareholder model (see below).
Great Britain (1990–2005)
The period from 1990 to the modern day saw
the arrival of laws in Britain that either recom-
mended or imposed amortization of goodwill. To
fully understand this evolution, we need to look
at what was happening in international standards.
In 1990 ED 47 (ASC, 1990) recommended system-
atic amortization of goodwill, but no ?nal draft
followed due to ?erce opposition by businesses
(Brown, 1998, p. 61; Paterson, 2002b). In 1993, a
discussion paper (ASB, 1993) also recommended
systematic amortization, and in 1997, FRS 10
(ASB, 1997), preceded by FRED 12, made capital-
ization plus systematic amortization over a period
of up to 20 years the preferred method, although
non-amortization with application of an annual
impairment test was also allowed.
As company law required goodwill to be amor-
tized, and considered that non-amortization was
justi?ed only if necessary to provide a true and fair
view, and even then subject to providing evidence
that the goodwill had an inde?nite life, it is possi-
ble to assert that systematic amortization was the
basic new rule.
Overall, in spite of the fact that goodwill was
yet not formally recognized as a true asset, the
rules were clearly leaning towards the dynamic
solution. But an alternative approach was still
allowed as an option. This dualistic stance can be
interpreted in two ways:
– the most plausible interpretation is that the
British standard-setters had to yield to the solu-
tions adopted in the United States and the
IASC (1993), which favoured systematic
amortization;
– but alternatively, it may indicate that some Brit-
ish businesses were looking to replace the write-
o? practice by another, more favourable
approach: non-amortization with impairment
tests. This would make the issue not write-o?
vs. amortization, but write-o? vs. the actuarial
approach.
Germany: the (short) dynamic phase (2000–2005)
In a context of globalization and the rising
power of the American corporate governance
model, backed by certain international accounting
organizations such as the IASB, it is not surprising
that there were many calls in Germany at the end
of the 20th century to end German ‘‘peculiarities’’
and align practices with the dominant American
views.
In 1998, the law ‘‘on the facilitation and the
reception of capital’’ (KapAEG) introduced an
article (292a) in the German Commercial Code
allowing German groups (until 2004) to adopt
IAS and even US GAAP for consolidated
accounts, provided these rules were compatible
with the European Directives and the GoB (‘‘Grun-
dsa¨ tze ordnungsma¨ ssiger Buchhaltung’’, i.e. ‘‘Princi-
ples of proper accounting’’ – German GAAP).
The DSR (Deutscher Standardisierungsrat –
German Accounting Standards Board), a new
body charged by the Ministry of Finance to forge
new regulations for consolidated accounts, con-
?rmed with its ?rst standard, DRS1 (DSR,
1999), that American rules could be considered
as equivalent to the GoB. Then in July 2000, the
DSR published DRS4 (DSR, 2000) on the ‘‘acqui-
sitions of companies and group accounts’’. This
DRS, schematically: (1) imposes systematic capi-
talization of goodwill as an element of the compa-
nies’ wealth (DRS 4.1f); (2) prohibits all write-o?s
against equity (DRS 4.27–29); (3) imposes system-
atic amortization (normally straight-line) over the
period of use, up to a limit of 20 years (DRS 4.31).
An impairment loss may be booked in addition to
this amortization if the recoverable value is lower
Y. Ding et al. / Accounting, Organizations and Society 33 (2008) 718–755 737
than the net book value (DRS 4.34). Clearly, as a
whole, the DRS espoused the IASC’s positions,
themselves fundamentally in line with American
conceptions at the time.
In 2001 the American standard-setter published
SFAS 142 (FASB, 2001b) which rang the death
knell for systematic amortization of goodwill, in
favour of an actuarial solution (impairment based
on the estimation of future cash ?ows). The DSR
faced a dilemma: could it go on asserting that
the new American rules were compatible with
European and GoB rules?
Despite the warnings of many of the major
actors in German doctrine, such as Busse von Col-
be (2001, p. 879) and Hommel (2001, p. 1943), and
more broadly the majority of the members of the
Scienti?c Committee for Accounting (Wissenschaf-
tliche Kommission Rechnungswesen) (according to
Siegel, 2002, p. 749), the DSR, after an ‘‘animated
debate’’, published DSR1a (DSR, 2002), specify-
ing that the new American doctrine on goodwill
did not prevent adoption of FASB standards as
a substitute for GoB. It also upheld DSR4 as
before. These decisions sent shockwaves around
Germany. Even the most moderate of commenta-
tors underlined the totally contradictory nature of
the two standards, and the apparent illegality of
the adopted American rule in view of the seventh
directive and the GoB (Busse von Colbe, 2004;
Duhr, 2003, p. 974; Moxter, 2001, p. 1; Schild-
bach, 2005, p. 1; Krawitz cited in Siegel, 2002, p.
749). The only remaining hope for these numerous
objectors was the possibility of a veto by the Ger-
man Ministry of Justice. Unfortunately for them,
the DSR standard was rati?ed on April 6, 2002.
As all this shows, the struggle over goodwill has
been played out in very dramatic conditions in
Germany. Against very strong resistance by the
German doctrine to the new American position,
the defenders of the new international order
needed to force a passage for the new philosophy
of impairment, in anticipation of its rati?cation
by the European Union.
Phase 4: the actuarial phase
The ideal dreamed of by authors like May (1957),
who had recommended non-amortization of good-
will, came true for the ?rst time independently of
any tax considerations in the United States at the
end of the second half of the 20th century.
US (2001–nowadays)
The adoption of an actuarial conception of
accounting in the US goes back to the Concept
Statements (CS) No. 5 (FASB, 1984) and 6
(FASB, 1985). But its application took time. Only
after more than 20 years did the revolution actu-
ally happen, with the adoption of SFAS 141 and
142 (FASB, 2001a, 2001b) to supersede APB
Opinion No. 16 and 17 (AICPA, 1970a, 1970b),
a major event in the United States. Under these
new standards, goodwill, whether acquired indi-
vidually or in a business combination, will no
longer be amortized but submitted to an impair-
ment test, by comparing the fair value of reporting
unit goodwill with the carrying amount of that
goodwill (FASB, 2001b, Section 20). These new
standards represent a victory for the actuarial
approach: goodwill is an asset whose value
depends on future factors.
Other countries: moving towards the actuarial
phase?
As this article was being written, another
important event took place: the adoption in March
2004 of standard IFRS 3 (IASB, 2004b) which
replaces IAS 22 (IASC, 1993), and the revised
standard IAS 38 (IASB, 2004a). IFRS 3 requires
goodwill acquired individually or in a business
combination to be recognized as an asset, prohib-
its amortization of goodwill acquired and instead
requires the goodwill to be tested for impairment
annually. As the IASB explicitly states (2004b,
Section IN3), ‘‘it would be advantageous for inter-
national standards to converge with those of Aus-
tralia and North America’’.
Since all listed EU companies have been obliged
to prepare their consolidated ?nancial statements
under International Accounting Standards/Inter-
national Financial Reporting Standards from
2005 onwards (European Union, 2002), the three
other countries in our study, Great Britain, Ger-
many and France entered the actuarial phase in
2005, at least for the consolidated ?nancial state-
ments of listed companies.
738 Y. Ding et al. / Accounting, Organizations and Society 33 (2008) 718–755
Discussion
The reasons for the new solution
The actuarial solution has been seen by some
authors as an ‘‘optimal’’ solution in that it enables
a business to manage results better (Kleindiek,
2001, p. 2576; Ku¨ ting & Reuter, 2005) and, at
macroeconomic level during the life of the ?rm,
to increase the mass of assets without diminishing
the mass of results, by postponing recognition of
impairment to the last moment when companies
are in a state of bankruptcy (see Paterson, 2002a,
for a similar view). For a short-term-oriented man-
ager or shareholder, this actuarial view is much
‘‘better’’ than the pure static view, which leads to
massive losses at the beginning of the investment
cycle, ‘‘better’’ than the weakened static view,
which produces a decrease in equity and so weak-
ens ?rms’ leverage, and even ‘‘better’’ than the
dynamic view, which reduces earnings all along
the cycle (Richard, 2004a, 2004b).
Pooling was a good solution for pro?t but not
for the balance sheet: it created ‘‘hidden reserves’’
(Johnson & Petrone, 2001, p. 101) which was
problematic in a context where ?rms seek to dis-
play their ‘‘strength’’ to their shareholders. It also
had a very bad reputation and prevented compara-
bility of results (FASB, 1998, 1999; Johnson &
Yokley, 1997; Johnson, 1999, p. 80). The new
actuarial solution was seen as ‘‘optimal’’ in the
sense that it o?ered nearly all the ‘‘advantages’’
of pooling, without its ‘‘disadvantages’’.
It is interesting to note that the actuarial
approach was generally judged a good solution
by the ‘‘elites’’ of the countries studied at the time
(see below).
US
Why was the US the ?rst to refuse the static
solution (pure or weakened), ?rst adopting the
dynamic solution then switching to the actuarial
approach, and why did it take the other countries
so long to choose the dynamic and actuarial
solutions?
As far as the US is concerned, our study is in
line with recent research by economists, especially
Lazonick and Sullivan (LS in the rest of the paper)
(2000) and Aglietta and Re´be´rioux (AR in the rest
of the paper) (2004). These authors have shown
that ‘‘corporate governance for most US corpora-
tions, from their emergence in the late nineteenth
and early twentieth century through the 1970s,
was based on the strategy of retain and reinvest’’
(LS, p. 24). They have also shown that throughout
this period, the pressure of professional stock mar-
ket investors was very low (LS, p. 31) and that
‘‘top managers tended to be integrated with the
business organizations that employed them’’ (LS,
p. 24) which means that the power was generally
in the hands of block shareholders and banks
(stakeholder model). Our study shows that this
retain-and-reinvest strategy was nevertheless in
decline as the accounting system moved from a
pure static to a dynamic stance. The reason for this
decline is presumably linked to the ‘‘conglomera-
tion mania’’ and ‘‘massive expansion of corpora-
tions that had occurred during the 1960s’’ that
‘‘resulted in poor performance’’ and ‘‘huge debt
burdens’’ in the 1970s (LS, pp. 15–17): to cope
with this situation, big American corporations
were obliged to switch their accounting system to
a dynamic solution.
Due to international competition, the American
economy turned towards a more ?nancial
approach with a focus on short-term gains (LS,
pp. 15–16). There was progressive deregulation
of the banking sector in favour of savings and
loans institutions (LS, p. 17), and rapid develop-
ment in pension and mutual funds. This rise in
the importance of professional shareholders was
accompanied by a fall in the strength of trade
unions, as job tenure diminished (LS, pp. 19–21).
All these converging factors explain why the power
went to short-term-oriented professional share-
holders, and why there was a strong trend towards
maximum short-term pro?ts, with distribution of
massive dividends evidenced by the rising pay-
out ratios in the 1980s and 1990s (LS, p. 22; AR,
p. 83). It is no wonder that abandoning the
dynamic solution for the actuarial solution was
the natural consequence of this evolution.
In the course of this development, managers
disappeared from the scene. Their role in the
power game is, of course, contested. According
Y. Ding et al. / Accounting, Organizations and Society 33 (2008) 718–755 739
to the famous Berle and Means thesis (1932), in
most large American companies, managers
achieved power due to the dispersion of shares.
This theory has also been used as one of the pillars
of the agency theory, whose main purpose is to
?nd a way to solve the fundamental con?ict
between managers and shareholders (Jensen &
Meckling, 1976). But the Berle and Means thesis
has been challenged by Zeitlin (1974) and many
other authors. This kind of position has been
taken up recently by Lazonick and O’Sullivan,
who point out that contrary to those who have
argued ‘‘often without justi?cation, that the man-
agers who control the allocation of corporate
resources and returns are self-serving in the exer-
cise of this control’’, ‘‘shareholders and [our
emphasis] top managers have certainly bene?ted
under the rule of shareholder value’’ (2000, p. 27).
As far as accounting for goodwill is concerned,
it is di?cult to ?nd any expression in the American
literature of top management opposition to the
concealment of systematic amortization of good-
will. Globally speaking it seems, as one leading
American economist appears to acknowledge (Sti-
glitz, 2003, p. 175), that managers have followed
the holders of power, i.e. the professional
shareholders.
The actuarial method adopted in the US also
o?ers an interesting example, supporting the the-
ory developed by Robson (1993) on the gap
between the outcomes of accounting regulation
and the calculations of actors involved in the pro-
cess. The major selling point of non-amortization
and impairment testing of goodwill is that it
should provide accounting numbers closer to the
true market value, and therefore more useful to
investors. However, ‘‘while goodwill impairment
must be regularly assessed, the actual application
of SFAS 142 results in recognizing goodwill cre-
ated by the reporting entity subsequent to the pur-
chase combination, to the extent that this replaces
or o?sets impaired goodwill, so in many cases
impairments will not be recognized even when
the value of the acquired operations has declined.
This approach which reverses the longstanding
ban on recognizing created (as opposed to pur-
chased) goodwill was necessitated by the virtual
impossibility of separately identifying elements of
goodwill having alternative derivations. Even with
this simplifying approach, measurement of good-
will impairment is a fairly di?cult task, often
requiring the services of independent valuation
consultants’’ (Delaney, Nach, Epstein, & Budak,
2003, p. 427). Given that fair values are not readily
available for many of the reporting units to which
goodwill balances were assigned, managers enjoy a
certain amount of discretion when applying this
standard (Bens, 2006). Beatty and Weber (2006)
show empirically that in the adoption of SFAS
142, ?rms’ equity market concerns a?ect their pref-
erence for above-the-line vs. below-the-line
accounting treatment of goodwill, and ?rms’ debt
contracting, bonus, turnover, and exchange delist-
ing incentives a?ect their decisions to accelerate or
delay expense recognition.
Great Britain
To continental European actors, Great Britain
is often associated with the idea of stock market
domination and dispersed shareholders, like the
US, possibly to an even greater degree. But this
is a false picture. Historians of British business
have shown that ?nancial capital and especially
stock market capital only began to play a leading
role for the majority of large British ?rms in the
1970s (Wilson, 1995, p. 193), and that ‘‘the share-
holder pre-eminence achieved in the 1980s and
1990s, far from being a normal state of a?airs, is
an anomaly’’ (Davies, 2002, quoted by Armour,
Deakin, & Konzelmann, 2003, p. 2). Before that
period, the family ?rm directed by ‘‘gentlemen’’
(i.e. owner–managers) was the dominant feature
of the British economy (Coleman, 1987, p. 8;
Gourvish, 1987, pp. 33–34; Wilson, 1995, p. 155).
It is therefore unsurprising that until that time,
self-generated capital was still the most popular
means of funding investments (Hannah, 1983, p.
62; Wilson, 1995, p. 129–130). If we add that Brit-
ish banks went on pursuing a conservative strat-
egy, it is easy to understand why the traditional
weakened static solution initiated by Dicksee
(1897) could have been so successful for so long:
it guaranteed satisfaction for both self-?nancing
family owners and prudent bankers alike. This de
facto alliance between creditors and long-term
740 Y. Ding et al. / Accounting, Organizations and Society 33 (2008) 718–755
investors was particularly acute during the inter-
war years, as stressed by Edwards (1989, p. 138)
and Maltby (2000), but has had very long-term
consequences for goodwill. Of course from the
1970s, with the growing importance of ?nancial
capital, the British economy became a kind of
dualistic economy, with the persistence of the tra-
ditional family ?rm on one hand, and the rise of
international giants ?nanced by external capital
on the other. This explains why, when discussion
of SSAP 22 was going on in the early 1980s, there
was a clash between proponents of the weakened
static view and tenants of the dynamic approach.
With the era of takeover bids (the second half of
the 1980s) and the need to in?ate balance sheets
in order to ward o? predators, the static solution
became more and more problematic for many
British giants. This, plus the in?uence of the dom-
inant international solutions of the time, may well
explain why the dynamic solution emerged in Brit-
ain in the 1990s. Although, as Armour et al. (2003,
p. 22) underline, the provisions of European Com-
munity Directives could be ‘‘a major countervail-
ing force to shareholder primacy’’, the fact is
that in 2002 a signi?cant majority (74%) of British
CFOs stated that companies were eager to apply
IAS before 2005, presumably because Great Brit-
ain has a strong capital market (Holgate & Gaul,
2002).
Germany
Germany is the country where the pure or weak-
ened static solutions have taken the longest to dis-
appear. This is not surprising: until quite recently,
say the mid-1990s, the environment was very hos-
tile to shareholder value. Only after that period
were there signs that a change might be welcome.
As is well known, the traditional German system
of governance is based on three pillars (Ju¨ rgens,
Naumann, & Rupp, 2000, p. 59): the banks, co-
determination and company-centred management.
Up to 1998 the role of the stock market and pri-
vate pension funds in German companies’ ?nanc-
ing was marginal (Deutsche Bundesbank, 1999,
p. 25, cited in Ju¨ rgens et al., 2000, p. 62). The
power was largely in the hands of the big German
families and the banks, but under pressure from
employee representatives. These three groups, the
basis of the stakeholder model, form the tradi-
tional ‘‘governing coalition’’ (Hackethal, Schmidt,
& Tyrell, 2003). In 1992 the banks held no less
than 61% of the voting rights of the top 100 listed
companies by virtue of proxy votes (Baums & Fra-
une, 1995, p. 103). The in?uence of employee rep-
resentatives, although variable, was quite
important in a majority of supervisory boards
(Gerum, 1991). In this context, the problem was
not how to create value in the short-term and dis-
tribute dividends, but how to be self-?nancing,
reimburse bank loans and guarantee the stability
of the workforce in the long-term. Even German
managers, trained as technical rather than ?nan-
cial engineers (Eberwein & Tholen, 1990), were
party to the consensus in favour of accumulation
of wealth. No wonder that in these conditions,
accounting, and accounting for goodwill in partic-
ular, was directed towards prudence and retaining
income for the sake of creditors and their allies,
the managers. This fundamental characteristic
has been demonstrated by German authors (Barth,
1953; Beisse, 1993; Do¨ llerer, 1971; Moxter, 1998;
Scho¨ n, 1997; Weber-Grellet, 1999) as well as
French authors (Richard, 2002a).
But in the middle of the 1990s things began to
change. A series of inquiries (Fo¨ rschle, Glaum, &
Mandler, 1998) showed that, in a context of mar-
ket globalization and the need (partly resulting
from German reuni?cation) to ?nd new ways of
?nancing on the Anglo-American stock markets,
some top managers in Germany’s largest and most
internationalized listed companies began to see
corporate development along the lines of the
model recommended by American consultants
and academics, serving shareholder value (see also
the examples given by Ju¨ rgens et al., 2000, p. 74).
Presumably under this in?uence, the government
issued a series of regulations designed to develop
a more ‘‘Anglo-Saxon’’ type of management: crea-
tion of a ‘‘German SEC’’ (1995) which merged in
2001 with the German Financial Services Author-
ity, abolition of capital gains tax (1998), authoriza-
tion for the creation of private pension funds
(1998), creation of the ‘‘new stock market’’
(1997), abolition of multiple voting rights and
restrictions on banks concerning the use of proxy
Y. Ding et al. / Accounting, Organizations and Society 33 (2008) 718–755 741
votes and cross-shareholdings (1998), introduction
of a mandatory bidding procedure in the new take-
over law of 2001, and creation of a new private
body for the promotion of international account-
ing standards.
All these measures, particularly the related
rapid development of private pension funds guided
by shareholder value principles, signi?cantly chan-
ged the landscape and style of management among
the elite major listed companies and banks (Ju¨ r-
gens et al., 2000, p. 71). This extremely fast-paced
change may explain why listed German groups
were allowed to opt for international or even
American accounting principles from 1998, and
why Brussels encountered no German opposition
to adoption of the new international rules concern-
ing treatment of goodwill in consolidated
accounts. All in all, the famous laws of 1998 on
the ‘‘Raising of Equity Relief – Kapitalaufnahme-
Erleichterungsgesetz’’ and Kontrag, as described
by German authors (Bo¨ cking & Orth, 1998,
1999; Claussen, 1998; Haller & Eierle, 2004; Hom-
melho?, Krumnov, Lenz, Mattheus, & Schru?,
1999), and analyzed by Richard (2002b, 2002c),
have encouraged a clear trend towards US man-
agement criteria for major German companies.
France
Like Britain, the case of France may appear sur-
prising. In spite of its traditional reputation as state
and family driven (the famous ‘‘cent familles’’ said
to control the country), France adopted a dynamic
treatment for goodwill (as far as consolidated
accounts are concerned) sooner than Germany
and even Britain. The explanation is relatively sim-
ple. As shown by French economists, notably by
Morin (2000, pp. 41–42), on the basis of documen-
tation provided by the Banque de France, France is
a country where the in?uence of foreign (especially
what the French call ‘‘Anglo-Saxon’’) investors is
very high. By 1985, the share of foreign ownership
on the various French stock exchanges had reached
10%; and it grew to 35% in 1997. Over that period,
probably in line with this shift of power on the
stock market, the traditional ‘‘cross-shareholding’’
model was disintegrating, especially after 1996
(Morin, 2000, p. 38). The growing in?uence of for-
eign investors, notably the North American pen-
sion funds, has driven a new style of management
oriented towards shareholder value. During the
last 10 years, the average duration of shareholding
by large investors in French listed ?rms has
decreased from 7 years to 7 months (de Kerdrel,
2006). Morin (2000, p. 45), after interviews held
in 1998 with managers of leading French compa-
nies, says he ‘‘has been able to verify that this diktat
regarding norms is being observed throughout the
CAC 40 index companies’’. He adds (p. 49) that
‘‘many directors admit that it is impossible to
escape the demands made by the US and British
investors’’, which con?rms our hypothesis of a link
between management and professional sharehold-
ers. This evolution in French capitalism from a
stakeholder towards a shareholder model is also
observable in accounting regulations: Colasse and
Standish (1998) have shown how membership of
the CNC (Conseil National de la Comptabilite´ –
National Accountancy Council), the accounting
regulatory body, has rapidly evolved in the nineties
in favour of representatives of large (listed) enter-
prises and audit companies, to the detriment of
the public sector. All these factors explain why
French accounting legislation on goodwill has, at
least since 1985, followed American or interna-
tional standards.
Impact of accounting for goodwill on the
shareholder model and the economy
At the beginning of the article we mentioned the
existence of a reverse link between accounting for
goodwill and the social and economic environ-
ment. The impact of various interest groups on
goodwill treatment has been demonstrated
throughout, and some attention should now be
given to this reverse link.
Even Brilo?, a major opponent to pooling of
interests as already mentioned, cites one argument
often put forward in support of the method:
‘‘many business combinations would not have
been consummated if ‘pooling accounting’ were
proscribed’’ (Brilo? & Engler, 1979). The implica-
tion is clear: the accounting technique has a direct
impact on the economy through the realization of
the transaction.
742 Y. Ding et al. / Accounting, Organizations and Society 33 (2008) 718–755
In a report, Plihon (2002) states that the weight
of goodwill, compared to equity, is extremely
important because of the very high-value acquisi-
tions of the 1990s. Consequently, he anticipates
that goodwill amortization will negatively impact
prospects for future pro?ts and pro?tability in
the medium term, which could lead to a rise in
the level of debt and consequently generate a risk
of insolvency and illiquidity.
Plihon’s report was written before France’s
adoption of IFRS. Taking the move to IFRS into
account, Boukari and Richard (2006, p. 84, 88)
?nd on a sample of 146 large French listed ?rms
that the adoption of IFRS in 2005 resulted in a
42% increase in 2004 net income (restated to
IFRS) compared to the original one (French
GAAP
5
). More interestingly, 60% of the increase
in net income can be attributed to cancellation of
goodwill amortization in favour of impairment.
This situation, which can reasonably be expected
in other countries switching from goodwill amorti-
zation to impairment, provides evidence of the
impact of the change in accounting standards on
net income, which, in turn favours shareholders.
Combining these two examples, the following
assumption can reasonably be reached: beyond
the improvement of pro?t through impairment,
the change in accounting regulations for goodwill
was also intended to have an economic impact:
facilitation of mergers and acquisitions.
Although we can provide no direct evidence for
this, we can quote Brown-Humes (2006), who
observes a ‘‘record amount of mergers and acqui-
sitions in Europe’’ in 2006, explaining that two
key trends encourage M&A activity: debt is cheap
and ‘‘corporate balance sheets are healthy’’.
Regarding this second reason, it can safely be
assumed that the replacement of goodwill amorti-
zation by an impairment test will lead to ‘‘health-
ier’’ balance sheets, as the reported goodwill will
not reduce future equity (as long as a material
impairment is not recorded).
Given that the shareholder model ‘‘lives on’’
business combinations, this accounting technique,
in facilitating business combination transactions,
fosters the trend towards the shareholder model.
Conclusion, limitations and directions for future
research
This article sets out to study the evolution of
accounting for goodwill in four countries, Great
Britain, the United States, Germany and France,
over a period of more than one century. We show
that at the outset these four countries were in an
identical position, with a static vision of account-
ing for goodwill, and that they are all currently
converging towards another common phase using
the actuarial approach (recognition and impair-
ment testing), as far as listed (more precisely, cap-
ital-market oriented) companies are concerned.
Interestingly, the actuarial view, which is in the
process of becoming the dominant practice, was
already in existence in the 1900s.
We have attempted to explain this evolution
with reference to the stakeholder and shareholder
models. While the stakeholder model was the most
dominant at the start of the period covered by our
study, the shareholder model is clearly the most
in?uential in our own time. The US model was
therefore the ?rst to feel the need to change the
old system (expensing or charging to reserves),
and subsequently the ?rst to adopt amortization,
then impairment testing. In the stakeholder model,
owners are more concerned for the ?rm’s long-
term viability due to their active involvement in
management, their understanding of the ?rm’s
future prospects and the relative di?culty of exits.
In the shareholder model, shareholder–owners
have lost patience and even interest in the nuts
and bolts of the ?rm’s actual business and are
demanding faster and bigger ?nancial returns.
We show that there has been an evolution in
accounting regulations on goodwill in the four
countries studied towards the actuarial phase,
which is totally di?erent from the initial phase,
the static approach.
We are of course aware that several issues and
problems remain and deserve more in-depth anal-
5
This comparison was possible because all French listed ?rms
were required to publish a comparative table showing the net
income for the previous year (i.e. 2004) computed under both
sets of standards: IFRS and French GAAP.
Y. Ding et al. / Accounting, Organizations and Society 33 (2008) 718–755 743
ysis and discussion: (1) The alternative theories
that could explain the evolution of accounting
treatments for goodwill, especially the recent inter-
national harmonization of practices; (2) the choice
of the four countries studied and the general nat-
ure of our analyses; and (3) the suitability of our
theory for explaining other accounting changes.
First, as noted earlier, the ‘stakeholder vs.
shareholder’ question is a standard theme in
?nance and corporate governance literature. How-
ever, the long-term vs. short-term orientation may
not be the only attribute di?erentiating these two
models. Because of their active involvement in
management and greater access to information,
owners in the stakeholder model do not need to
rely solely on public ?nancial accounting informa-
tion for their decision-making, and are therefore
more tolerant of less timely and less decision-rele-
vant ?nancial reporting based on historical cost.
Conversely, investors in the shareholder model
use mainly publicly available accounting informa-
tion for their decision-making and so their demand
for timely, ‘‘actuarial’’ disclosure is very high.
The international politics of accounting is also
very helpful in understanding why France and
Germany (and to a lesser extent, the UK) followed
the US on the matter of accounting treatments of
goodwill. Examining the interconnections between
international politics and accounting professional-
ization projects at local level in Greece, Caramanis
(2002) shows ‘‘how intertwined accountancy and
the broader socio-economic and political domain
are, not only at the local, but also at the interna-
tional level’’. Hirst and Thompson (1995) have
emphasized the role of politics in the ‘globaliza-
tion’ era, with particular reference to the interna-
tional accounting profession. They write that
‘‘major states may play a pivotal role, while the
authority and sovereignty of lesser states may be
continuously challenged and negotiated in a realist
fashion’’ (p. 408). Their analysis can easily be
applied to the adoption of IAS/IFRS (and there-
fore the actuarial phase of goodwill treatment) in
Europe.
Second, the choice of the four countries in our
survey is open to some debate. As explained, they
were chosen because they represent the Western
world, but we willingly acknowledge that other
countries could validly be added to the sample.
As an example of a possible future expansion on
this article, we present in Appendix 1 the results
of a preliminary investigation into a major Asian
country, Japan, showing that Japan has reached
the dynamic phase but is reluctant to adopt the
actuarial phase. Despite this reluctance, it can rea-
sonably be assumed given the current trend
towards IFRS that Japan will also converge to
the actuarial approach. China could be another
interesting example. Its capital market, founded
at the beginning of the 1990s, now lists more than
1400 companies. Most of these companies are still
clearly operating under the stakeholder model: a
large portion of their shares (around 60% on aver-
age) is held by the State, other State-owned ?rms
or families (Ding, Zhang, & Zhang, 2007). How-
ever, things have been changing very fast in China
recently. After the reform of 2005, the State-owned
shares in most listed companies became tradable.
About 200 mutual funds are now operating in
China and foreign investment funds are also
allowed to enter, subject to approval. Also, since
2006 stock option incentive plans have begun to
spread in Chinese ?rms. To accompany all these
developments China began a major accounting
harmonization move on January 1, 2007, adopting
accounting standards very close to IAS/IFRS,
including the actuarial approach for goodwill
treatment, and capitalization of development
costs. In this context, the adoption of the actuarial
approach is certainly an advantage for short-term-
oriented investors.
In Japan and China, the international politics
of accounting may provide an enlightening analyt-
ical framework. These countries, like many others,
are having to accept the new rules of the account-
ing ‘‘world game’’, because not joining in endan-
gers their participation in the world economy.
But the shareholder model remains important in
a context of international politics, for two reasons:
‘‘contagion’’ and ‘‘acceptance’’. ‘‘Contagion’’, as
the word suggests, means that a new type of
accounting can only be explained by the emer-
gence of shareholder power in the ‘‘key’’ countries
that ‘‘set’’ the rules of worldwide accounting gov-
ernance. The source of all change is, in our opin-
ion, linked to the history of these key countries.
744 Y. Ding et al. / Accounting, Organizations and Society 33 (2008) 718–755
Meanwhile, ‘‘acceptance’’ – willing or under dur-
ess – in countries still marked by the stakeholder
model of the new game rules that favour share-
holder interests can only come about if the coun-
try’s political power is not fundamentally
opposed to shareholder interests.
Finally, another interesting area for exploration
would be a search for other balance sheet items
that may be facing the same changes as goodwill.
As shown by Richard (2005c), France has seen
an evolution from the ‘‘static’’ to the ‘‘dynamic’’
phase for most assets. While the actuarial phase
may not yet concern tangible ?xed assets and most
intangible assets, the actuarial value ‘‘germ’’ may
well be progressively spreading through the struc-
ture proposed by the IASB, particularly as the
principle of systematic amortization of intangible
assets has been abandoned for assets with an
inde?nite useful life (Richard, 2005c, p. 115). More
generally, we have some examples apparently indi-
cating that goodwill cannot be an isolated case:
these examples concern long-term investments,
development costs and environmental expenses.
The case of long-term investments is particu-
larly interesting. In around 1900, there appears
to have been no speci?c treatment for such items,
which were accounted for statically in the same
way as short-term investments, with adjustment
for changes in their market value (although for
reasons of conservatism, often only downward
changes were recorded). Then during the 20th cen-
tury the dynamic view emerged, with a move to
di?erentiation between long-term investments
and short-term investments, suggesting that only
long-term investments should be valued by the
cost method or the equity method, or that market
?uctuations that are ‘‘other than temporary’’
should be eliminated. Another frontier was crossed
with the arrival of IFRS (see IAS 39, IASB, 2003):
for certain items, e.g. ?nancial assets designated at
fair value through pro?t or loss, valuation based
on an actuarial method was allowed.
The treatment of development costs also reveals
the same trends as those identi?ed in our historical
discussion (see Richard, 2004a). In around 1900,
the normal accounting method for these costs
was immediate expensing (the static view). Then,
throughout the 20th century, people argued for
capitalization followed by amortization (Richard,
2005c, p. 105), and this dynamic solution was the
approach selected by the IAS (see IAS 38, IASB,
2004a), after its initial acceptance for certain
restricted situations (in some countries, for exam-
ple, capitalization was limited to exploration costs
only). Actuarial valuation of these expenses may
(still?) be a problem, but it can be considered that
the new conception of goodwill is encouraging an
actuarial approach to treatment of intangibles.
Finally, the treatment of environmental
expenses is a recent issue, and was unknown at
the start of the 20th century. This makes historical
comparison impossible, but a theoretical compari-
son can be sketched out. Taking the case of dis-
mantling costs for a nuclear power plant, for
example, the early 20th century lawyers in favour
of the static approach would clearly not have
approved of capitalizing such expenses, as they
relate to a ?ctitious asset with no liquidation value.
And yet this was the approach later taken by IFRS
and many of today’s laws. Environmental
expenses are capitalized and amortized over a cer-
tain period in a standard dynamic approach – and
some regulations go further and recommend dis-
counting. This vision, which has attracted severe
criticism from proponents of an ecological view
that objects to decreasing ecological liabilities to
the detriment of future generations, re?ects how
far actuarial reasoning has penetrated.
We must not allow ourselves to be misled by
these examples. There are several others that illus-
trate opposite trends, precisely because of the mul-
tiplicity of in?uences that can operate
simultaneously. In France, for example, now IFRS
have been adopted, it is no longer possible to
amortize advertising or training costs, and this is
a ‘‘step backwards’’ compared to the principles
of the dynamic accounting view. The internation-
alization of accounting can visibly bring certain
independent trends in individual countries to an
end, but may also be explained in the context of
a broader view.
To conclude, meticulous historical and geo-
graphic research into the changes in treatment of
the main types of asset and liability is necessary
to determine whether the theories in this article
are of general relevance. We believe that its essen-
Y. Ding et al. / Accounting, Organizations and Society 33 (2008) 718–755 745
tial merit is to raise the question of the evolution of
accounting capitalism, and o?er ‘‘old’’ European
accounting theories as an ‘‘archetype’’ (to borrow
the term used by Roberts, 1995) to settle the fun-
damental question of the classi?cation and evolu-
tion of accounting systems.
Acknowledgements
The authors would like to thank Anne d’Arcy,
Salvador Carmona, David Cooper, Garry Carne-
gie, Giuseppe Galassi, Luca Zan and participants
at the 3rd Workshop on Accounting and Regula-
tion (Siena, Italy, 2004), the ‘‘Accounting, Audit-
ing and Publication’’ Workshop (University of
Paris Sorbonne, IAE, 2004) and the EAA Annual
Congress (Go¨ teborg, Sweden, 2005) for helpful
comments. They also thank Hideki Fujii, Akihiro
Noguchi, Chikako Ozu and Kenji Shiba for their
valuable comments on Japanese regulations. The
authors are particularly grateful to Anthony Hop-
wood (the Editor) and the two anonymous review-
ers for their insightful suggestions. Responsibility
for the ideas expressed, or for any errors, remains
entirely with the authors. Herve´ Stolowy acknowl-
edges the ?nancial support of the HEC Founda-
tion (project F042) and the European
Commission (project INTACCT). He is a member
of the GREGHEC, CNRS Unit, UMR 2959. Jac-
ques Richard is a member of the CREFIGE. Part
of the research was conducted when the ?rst
author was a?liated to HEC School of Manage-
ment, Paris. The authors thank Ann Gallon for
her much appreciated editorial help.
Appendix 1. The case of Japan
The static phase (1967–1997)
Group ?nancial reporting is a relatively recent
development in Japan compared with the United
Kingdom and United States. ‘‘Financial reporting
in Japan has traditionally emphasized parent com-
pany ?nancial statements rather than consolidated
?nancial statements’’ (Nobes & Parker, 2006, p.
256). Very little has been written on the Japanese
treatment of goodwill. ‘‘The AICPA summary of
Japanese accounting (1987) notes that inter-corpo-
rate purchases are rare in Japan’’ (Dunne & Rol-
lins, 1992, p. 196).
The rules relating to non-consolidation good-
will and consolidation goodwill are to be found
in quite separate sources of authority. The non-
consolidation goodwill rules (which are relevant
for tax deductibility purposes) come from the
Commercial Code, whereas consolidation good-
will is regulated by the Securities and Exchange
Law and the Business Accounting Deliberation
Council (Cooke & Kikuya, 1992).
In March 1965, after an accounting scandal
involving the use of transactions between subsidi-
aries to manipulate earnings, the necessity of man-
datory consolidated ?nancial statements was
recognized. The government requested the Busi-
ness Accounting Deliberation Council to study
requirements for consolidated ?nancial state-
ments. In May 1967, the o?cial report ‘‘Opinion
on Consolidated Financial Statements’’ was issued
(BADC, 1967). This report was not an o?cially
endorsed accounting standard. On June 24, 1975,
the Business Accounting Deliberation Council
issued its ?nal opinion ‘‘Accounting Principles
for Consolidated Financial Statements’’ (BADC,
1975) which was endorsed the same day by the
Ministry of Finance (Ballon, Tomita, & Usami,
1976).
Purchased goodwill (non-consolidation good-
will) (called Noren or Eigyoken), but not consoli-
dation goodwill, is deductible for tax purposes
over a period of 5 years or less (Walton et al.,
2003, p. 191).
The 1967 report (Section 5.4) stated that ‘‘a
consolidation adjustment [Renketsu Chosei Kan-
jyo, the term used to refer to goodwill in Japan]
can be amortized for certain periods in the consol-
idated ?nancial statements. If it is of a small
amount, it can be charged in the income statement
of that period’’. There is no speci?ed amortization
period. It should not however be forgotten that the
1967 report was merely an opinion, and had no
legal backing.
The 1975 Opinion, which is the ?rst endorsed
accounting standard on consolidation, requires
that goodwill arising on consolidation must be
746 Y. Ding et al. / Accounting, Organizations and Society 33 (2008) 718–755
amortized by not less than the average annual
amount over its estimated useful life, with no max-
imum period speci?ed. However, the Commercial
Code provides that [non-consolidation] goodwill
shall be amortized by not less than the average
annual amount within 5 years after the acquisition.
In practice, therefore, [consolidation] goodwill is
amortized within 5 years or written o? immedi-
ately in the pro?t and loss account, in accordance
with the requirements of the Commercial Code
(Cooke, 1993, p. 465; Cooke & Kikuya, 1992, p.
210; Lee & Choi, 1992, p. 222; Nobes, 1991, p.
64; Nobes, 1993, p. 50; Nobes & Norton, 1996,
p. 183, table 2, p. 184, table 3; Nobes & Norton,
1997, p. 139; Sakurai, 1996, p. 485).
No weakened static phase
This phase is identi?able in all the countries
except France, as mentioned earlier, and Japan.
The Japanese situation can probably be explained
by the relatively late arrival of regulations on
goodwill. When the 1967 and 1975 texts were pub-
lished, it was necessary to educate companies, and
amortization over a short period appeared the
most ‘‘reasonable’’ solution, particularly as it was
in line with the treatment applicable for non-con-
solidation goodwill.
The dynamic phase (1997–nowadays)
An amendment to the consolidation policy and
procedures (BADC 1975 Opinion) was released in
1997 and became e?ective from ?scal years begin-
ning on or after April 1, 1999. Major changes for
business combinations resulting from acquisitions
include the following: the amortization period for
the consolidation adjustment, i.e. goodwill, arising
on business combinations has been extended from
5 years to the maximum of 20 years (Walton et al.,
2003, pp. 191–192). Japanese companies had com-
plained that this ?ve-year period fell far short of
the 40 years allowed for US companies, and could
be an obstacle to their M&A strategies. The new
Japanese regulation corresponds to the period
speci?ed in the IASC standards.
The BADC also issued a Statement of Opinion,
‘‘Accounting for Business Combinations’’, on
October 31, 2003. This standard, which does not
replace the 1975 Opinion, as it deals with pur-
chased (non-consolidation) goodwill, states that
goodwill is to be systematically amortized over
20 years or less, and must also be subject to an
impairment test. The standard is e?ective for ?scal
years beginning on or after April 1, 2006. By issu-
ing this text, the BADC has aligned the treatment
of non-consolidated accounts and consolidated
?nancial statements.
Resistance to the actuarial view
Japan can be considered as a ‘‘recalcitrant’’
country. In a letter sent to the IASB dated Novem-
ber 2, 2001, the Chairman of the ASBJ (Account-
ing Standards Board of Japan) wrote the
following: ‘‘We are opposed to non-amortization
of goodwill (. . .) and we believe that goodwill
should be amortized within a certain period and
be subject to impairment when necessary’’.
6
On
April 2, 2003, The Japanese Institute of Certi?ed
Public Accountants sent a comment letter to the
IASB on ED 3, taking a position similar to that
expressed by the ASBJ in 2001.
7
In a release published in January 2006, the
ASBJ stated that ‘‘as a new Japanese standard
on business combinations will become e?ective in
2006, the ASBJ will make at least a tentative deci-
sion after reviewing the responses from market
participants, the implementation of IFRSs and
new developments discussed by the IASB and the
FASB’’.
8
There are several explanations for Japan’s
‘‘resistance’’ to the actuarial view. First, Japanese
accounting came late to the practice of consoli-
dated accounts. Second, the ASBJ declared in
2001: ‘‘We consider that IASB’s intention to set
up the accounting standard for goodwill by uncrit-
ical reference to the new standard in the United
States is too hasty. This new standard has only just
6
This letter can be found on the ASBJ website (http://
www.asbj.or.jp).
7
This letter can be found at the following address: http://
www.jicpa.or.jp/n_eng/e20030402.pdf.
8
This release can be found at the following address:
www.iasplus.com.
Y. Ding et al. / Accounting, Organizations and Society 33 (2008) 718–755 747
been issued in July 2001 and, in particular, the
appropriateness of non-amortization approach
and validity of impairment tests have not yet been
veri?ed at all. The IFRS, as an internationally
accepted accounting standard, should be carefully
established with discretion and we believe that ver-
i?cation of the e?ectiveness of the new US stan-
dard is necessary even if we are merely referring
to it’’.
9
This statement indicates a certain reluc-
tance to apply a rule without attentive examina-
tion and analysis. Third, the stakeholder model is
much stronger in Japan than the four countries
in our main study. ‘‘At the end of World War II,
Japan was confronted with the enormous task of
rebuilding its war-torn economy. With a limited
equity market and savings destroyed, govern-
ment-supported debt ?nancing was the only avail-
able source of funds. Encouraged by the
government and ?nanced by the Bank of Japan,
new enterprise groupings were formed around
Japan’s major commercial banks. These new
Keiretsu replaced the former Zaibatsu, huge pre-
war conglomerates, as the major engines of
Japan’s post-war economic expansion and the
ones most likely to need access to the US securities
market. Interdependence was fostered among
Keiretsu group companies through ?nancial, com-
mercial, and personal ties. Under such arrange-
ments, the relationships between the borrowing
company, related companies, and their bank were
very close. Cross-shareholdings between borrower,
related companies, and the bank were common’’
(Choi et al., 1983).
Furthermore, the impact of goodwill on earn-
ings is a less signi?cant issue in Japan. Due to anx-
iety over individual ‘‘loss of face’’, there has
traditionally been a Japanese aversion to individu-
alized ?nancial performance-by-results appraisal
and reward systems (Hopper, Koga, & Goto,
1999, p. 76) and accordingly Japanese accounting
for goodwill is more in?uenced by the interests
of long-term-oriented stakeholders. This is con-
?rmed by Suzuki (2007) who develops the idea
that accounting can do much more than simply
promote transparency and comparability of com-
panies for the sake of shareholders and investors,
having in mind the accounting’s impacts on local
economies and societies.
Meanwhile, as noted by Hopper et al. (1999, pp.
80–81), the Japanese economic and business world
has been changing as a consequence of ?nancial
crises. ‘‘Since the banks are struggling with bad
loans, companies that previously relied upon
banks for funding are now forced into self-?nanc-
ing or must go directly to ?nancial markets [our
emphasis]’’. In this new institutional context, we
can reasonably expect that sooner or later, Japan
will also enter the actuarial phase for its account-
ing regulations on goodwill.
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