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Policy Recommendation for Increasing M&As of Venture Companies in Japan

Large Impact of Making Goodwill Unamortized

No.411
Oct 2013
Research Fellow Kou Yukawa

 

ABSTRACT

1. One of the factors hindering the growth of venture companies in Japan is the lack of M&As of those ventures by large corporations. Not only would facilitating M&As spur the growth of venture companies, but by allowing large corporations to rapidly absorb external innovation, it would contribute significantly to the increased growth of Japan’s economy. This paper proposes a new accounting system to advance M&As, i.e., removing the requirement to amortize the goodwill paid during the acquisition process.

2. Goodwill can be a very expensive part of acquiring a venture company. This is because the acquisition takes into account future growth probability, and therefore the majority of the acquisition price is calculated as goodwill. In Japan, goodwill must be amortized within 20 years according to regulation and routinely amortized within 5 years when venture companies are acquired. However, in the US, where many large ICT corporations buy several venture companies every year, goodwill is not amortized at all.

3. This paper analyzes the past 10 years’ worth of business performance, major venture M&A deals, and percentage of total assets comprised by goodwill for Google, IBM, Oracle and HP, and simulates the effect on their performance if they were to amortize goodwill on their M&As, as is done in Japan.

4. The results of the analysis clearly show that goodwill balances and percentage of total assets have risen sharply in recent years. Because all 4 companies are progressively seeking more M&As, their goodwill balances are shooting upward and comprise up to 30% of their total assets. Furthermore, when amortization was carried out in accordance with Japan’s regulations, the amortization burden was abnormally large. Even a highly profitable company would see a dip in profits of 10-20%, and some companies lost half of their yearly net profits; this had an enormous effect on these companies. To increase M&As of venture companies and thus improve companies’ international competitiveness, goodwill should be made unamortized.

More Information

  • The full text is unavailable in English for this report.
    The original Japanese full text is here [1102 KB].