An Investigation of the Significance of Mandated Changes in Goodwill Amortisation Policy in Australia

This paper examines the controversy surrounding the use of the Inverted-Sum-Of-Years-Digits (ISOYD) method of goodwill amortisation and events leading to its banning by the Australian accounting regulatory bodies. Companies using the method claimed that a prohibition would reduce their share price and international competitiveness. On the other hand, efficient capital market proponents argued that the amortisation method was irrelevant to the economic position of a firm in the absence of any cash flow effects. This paper discusses these conflicting views and investigates possible motives for the choice of goodwill amortisation method through a cross-company analysis of key characteristics. In addition, sharemarket reaction to key events leading to the change of policy was examined using conventional event-study methodology. The cross-company analysis revealed significant differences in the goodwill characteristics between ISOYD companies and non-ISOYD companies which may have motivated their choice. The result of the event-study found that no significant abnormal return could be unequivocally attributed to any of the key events or announcements