The Association for Investment Management and Research (AIMR) has also addressed concerns over goodwill amortization. In a December 18, 1997 letter to the International Ac- counting Standards Committee, the AIMR Financial Accounting Policy Committee (FAPC) stated the majority view that goodwill amortization is unrelated to the assessment of future cash flows. They stated that amortization encourages both income statement and balance sheet manipulation that may not be easily undone by investment professionals because of insufficient disclosure related to the amortization charge and/or the selected lives. In addition, an October 19, 1998 AIMR FAPC letter to Lynn Turner, Chief Accountant at the U.S.
Securities and Exchange Commission, expressed concern about earnings management in six areas of financial reporting, including discretion surrounding the selection of estimated useful lives.3
The purpose of this paper is to suggest that the choice of amortization period does matter and this choice is not inconsistent with the academic research. Instead, we hypothesize that the important issue is not necessarily the dollar amount of amortization taken each year but the effect amortization has on post-acquisition earnings growth. In other words, firms may be more concerned with the impact of amortization on earnings if few synergies4 are expected from an acquisition since in those cases it is more likely that amortization will result in post-acquisition combined earnings being dilutive. This supposition is supported by a 1999PriceWaterhouse-Coopers (PWC) publication, Leveraged Recapitalizations, which suggests that firms could increase stock value by enhancing the accretive affects of acquisitions by minimizing annual goodwill amortization charges. PWC proposes using the longest life possible (40 years at that time) or writing goodwill off immediately as in-process research and development (IPR&D).5