Stewardship and Value Relevance in Accounting for the Depletion of Purchased Goodwill

Concerns have been raised in the academic and practitioner literatures of accounting that, in general, standard-setters have increasingly neglected stewardship and reliability in pursuit of value-relevance; and then, in particular, that current accounting for the vast sums now expended on purchased goodwill accords too much discretion to manager-agents/stewards, and is weak on verification – allowing them to mislead their investor-principals. This case of purchased goodwill is especially significant because the literatures of finance and industrial organization report that stewardship, or principal-agent, problems are rife in the M&A market. In the light of calls for changed priorities, this paper analyses an experiment with an alternative standard for the depletion of purchased goodwill designed to hold managers to account for every pound of spending on goodwill, and to secure more rigorous verification of goodwill impairments. Triangulated econometric exercises suggest that in the world’s second largest M&A market this alternative, twin instrument, regime secured value-relevant reporting while mitigating stewardship problems