Goodwill Accounting and Performance Measurement

Purpose - This paper outlines the link between value creation, performance measurement and goodwill accounting according to IFRS and US-GAAP. Since economic goodwill is identical to the present value of future residual income, we examine the question of how accounting information gathered for impairment testing of goodwill according to IAS 36 and FAS 142 can be used for internal control purposes.Design/methodology/approach - The paper adopts common assumptions in the literature of residual income based valuation and analytically derives a periodic performance measure of both value creation and its afterward realization based on information available from impairment testing.Findings - This paper shows that information required by IFRS and US-GAAP to evaluate a firms' goodwill can be used to design a performance measurement system which provides information about both value creation and afterward realization of value.Practical implications - From a practical perspective, we show that appropriate adjustments of the data used for impairment testing result in information which ideally fits the requirements for an optimal performance measurement system.Originality/value - The paper presents a performance measure which provides information about the actual creation of value as well as its afterward realization in a period and therefore is superior to traditional residual income based performance measures.