Amortization of Goodwill


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Posted by number2 on December 09, 1999 at 22:35:36:

I realize that this is more of an issue for accounting, and is partly theoretical, but since valuations depend on accurate earnings i think the subject is appropriate.
It has been bugging me for a while. I refer to the 5'th Eddition of Securitiy Analysis, where Warren Buffet is quoted as saying "The analyst can lead a rich and fulfilling life without knowing about goodwill or its amortization." The authors argue that, since the asset never existed economically, no cost was incurred in using it. What bothers me is, how do you accurately portray the aquisition cost then? If not through the creation of goodwill and its amortization in the income, what better way is there? Would allocation of the cost to other years, spreading the cost out, be a better method? What about with a company that makes several aquisitions each year, and thus builds up a rather large goodwill figure? Shouldn't there be some representation, or is the right method to simply dump the entire thing into the year in which the purchase was made?
I look forward to your opinions, because this is a matter which has confused me and fresh opinions on the subject would help a great deal.


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