This article was first published in the November 2018 UK edition of Accounting and Business magazine.

I am old enough to have witnessed four ways to account for an acquisition and have been dredging my memory for the pros and cons during the recent fuss over keeping goodwill on the balance sheet.

The fuss has been pumped up by the current acquisition boom; by the modern-day pile of intangible assets, whose value only appears on a balance sheet post-acquisition; and by delays in impairing goodwill even when market prices are screaming over-valuation.

In the good old/bad old days, goodwill – the difference between net assets, or equity, and the purchase price – was written off (unless assets were pooled in a ‘merger’). On the plus side, an investor in the acquiring company did not have to worry about goodwill turning to sand through their fingers. The disadvantage was that this flattered return on equity. So Lloyds Bank’s acquisition spree under the late Brian Pitman looked great – until cannier analysts added back goodwill.

As for merger accounting, while pooling the two balance sheets made some sense, the other trappings were sheer spin. One company was typically in the driving seat, claiming key management posts and location of the HQ after the deal. If it walks and quacks like a takeover, it is one.

Then we tried amortising all goodwill. This was particularly amusing during the TMT (technology, media and telecoms) bubble, which peaked at the turn of the millennium when Vodafone made its biggest acquisition – of Mannesmann for more than £100bn. Weighed down by an £11bn amortisation charge and other acquisition related costs, Vodafone reported what was then the biggest pre-tax loss in UK corporate history: £13.5bn. The company was dismissive of the accounting losses, and many observers had some sympathy.

Sadly that has set the scene for accounts users to become blasé about the amortisation of acquired intangibles, and managements now routinely count these charges out of ‘adjusted’ profits.

The International Accounting Standards Board (IASB) reformed the standard for business combinations in 2004. IFRS 3, Business Combinations, makes a logical distinction between acquired intangibles with a finite life, which are amortised, and residual goodwill, carried at the purchase price but tested for impairment.

The main problem has been the ineffectiveness of impairment testing. This is partly an auditing issue, but IASB staff have found that the value of acquired goodwill tends to be shielded by the ‘headroom’ of internally generated goodwill.

Whatever the IASB decides, the shifting sands of goodwill mean that accounts users are well advised to keep a record of how much a big acquisition cost – including the target’s net debt, restructuring charges and advisers’ fees. Academic research has tended to show that most acquisitions destroy value, but the management that made them is never going to admit that.

Jane Fuller is a fellow of CFA UK and serves on the Audit and Assurance Council of the Financial Reporting Council