A New Approach to Accounting Goodwill (and Other Identified Intangibles with Indefinite Useful Lives) : Theory and Empirical Evidence

I elaborate upon the foundations of Gecon – Economic Management System – model to propose a new theory on goodwill and other identified intangibles with indefinite useful lives. I reason that firm value is made up of its physical and intangible wealth, both continuously affected by passage of time and change of conjuncture. The first, more stable, is the opportunity cost of the implemented managerial decisions to buy, sell and manufacture assets. The second, more instable, is the economic value of the new ideas and plans still to be implemented, which seems to be the true nature of goodwill. The non-recognized intangibles act like the firm's virtuous. They are not separated assets, for their value is already reflected into the economic value of the physical and intangible wealth, the same way that virtuous in a person are embodied in her mind and body. According to this view, accounting goodwill is a portion of the intangible wealth of the acquirer, which quickly dissipates being converted (or not) into physical equity. Statistical tests on a 29,192 firm-year observation panel database show evidence that this new approach to goodwill (and other intangibles with indefinite useful lives) seems to be true