Tony Tollington’s book on Brand Assets is fascinating (although accounting rules have changed a bit, meaning the acronyms and rule numbers aren’t what are used nowadays).
Tollington notes the problems with the way accounting policy treated intangible assets. Some changes have occurred since but a lot of the points remain valid. The fascinating thing to highlight, that non-accountants might not instantly think about, is just how political the setting of accounting rules are.
Indeed, Tollington isn’t impressed with the conceptual basis behind the UK rules (as they were around the turn of the millennium) but says that they get top marks for pragmatism.
“…capitalisation is based on almost entirely pragmatic considerations rather than any conceptual basis as to the status of goodwill as an asset.” (Tollington, 2002, page 106). In essence, the UK sought to follow the US policy despite the US policy having arisen in a rather ‘arbitrary’ way.
To illustrate this he gives extensive details of the Accounting Standards Board hearing of September 1995. In many ways the best explanation of why the rules came about is Tollington’s summary of a commentator’s reasons for making a decision.
“* The goodwill debate had gone on too long and compromise was called for. * When it is very hard to choose between two alternatives, in this case between capitalized goodwill with or without amortisation, it often means it does not matter which one is chosen.” (Tollington, 2002, page 111)
This is a pretty good summary of how many committee decisions are made. To Tollington the accounting rules that emerged did not make much sense but at least ended the discussion.
Read: Tony Tollington (2002) Brand Assets, Wiley Finance