Date of Award

1992

Document Type

Thesis

Publisher

Edith Cowan University

Degree Name

Bachelor of Business (Honours)

Faculty

Faculty of Business

First Supervisor

Thea Christopher

Abstract

The purpose of this study is to ascertain factors that may explain an Australian firm's approach to accounting for goodwill and to examine the diversity that existed in accounting for goodwill in the pre-standard era. Utilising a costly contracting framework, determinants of the accounting policy choice are proposed and three separate groups of hypotheses are formulated. The ex ante hypothesis in this study utilises industry as an explanatory variable that would be expected to explain the motivations of accounting choices by firms. It was found that there is no significant association between industry classification and the choice of method in accounting for goodwill by firms. The result does not necessarily refute the hypothesis as this analysis only dealt with a small number of industries. each of which did not contain a large number of firms. It is believed that a larger sample s1ze with sufficient numbers 1n each of the industry groups would enable conducted, a more valid test to be The second group of hypotheses relate e~ post incentives to the choice of method in accounting for goodwill. In relation to the debt hypothesis, the association of firms' interest coverage ratios and the choice of accounting method not significant which conforms to what was expected. Contrary to expectation, the debt hypothesis is unable to be supported when using debentures as an explanatory variable. Empirical support was found for the proposition that firms which choose income-increasing methods of accounting for goodwill are more likely to be of a smaller size than those who choose income-decreasing accounting methods. The final group of hypotheses seeks to ascertain whether there is a difference 1n the size and the interest coverage ratios of firms that use single and firms that use dual policies of accounting for goodwill. In relation to firms' interest coverage ratios, it was found that there is no significant difference amongst firms that either use single income-increasing or single income-decreasing policies of accounting for goodwill and firms that use dual policies. In respect of the variable s1ze, it was found that there is a significant difference in the size of firms that use single income-decreasing and firms that use dual policies of accounting for goodwill. Firms that use single income decreasing policies of accounting for goodwill are larger in size than those who use dual policies.

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