An examination of the development and meaning of goodwill and the possibility of achieving a synthesis between its legal and accounting concepts
thesisposted on 31.01.2017 by Tregoning, Ian Hamilton
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This paper addresses the topic of goodwill and the possibility of achieving a synthesis between its legal and accounting concepts. The genesis for this topic was the assertion by the High Court in FCT v. Murry that the legal and accounting concepts of goodwill were different to the extent that a synthesis between the concepts could not be achieved. The approach taken involves an examination of the evolution, nature and treatment of goodwill in both the legal and accounting contexts. The major focus is on the legal concept, but significant attention is also given to the accounting concept to enable an examination of the possibility of a synthesis between the two. Thus chapters 2-12 deal largely with the legal concept of goodwill and chapters 13-14 deal with the accounting concept. Chapter 15 contains the final analysis and conclusions. Chapter 1 introduces the topic and addresses a range of definitions of goodwill, both legal and accounting definitions. Chapter 2 examines the evolution of goodwill as a commercial legal concept dating back to early references in the sixteenth century. Chapter 3 carries on the examination of the legal concept from the point of view of it major elements and sources. Chapter 4 deals with important issues which go to the heart of our understanding of legal goodwill. The essential issues concern the concept of goodwill as one whole item of property, inseparably attached to a business but separate from its sources. Chapters 5-12 examine the concept in a range of specific legal contexts in order to determine what they add to our understanding and also to determine how the essential nature of legal goodwill holds up in these various contexts. Chapter 5 deals with goodwill in the context of partnerships. Much of the case law involving goodwill in this context arose in the nineteenth century in relation to the termination of partnerships. Chapter 6 examines goodwill in relation to restrictive covenants designed to protect the goodwill of a business. The history of the law of restrictive covenants can be traced back to the fifteenth century, where an incipient notion of goodwill may be seen to be emerging. Chapter 7 examines goodwill in the context of stamp duties, a tax with a long pedigree stretching back to the late seventeenth century. Chapter 8 examines the authorities concerning the nature and treatment of goodwill in the contexts of licensing, leasing and franchising. In chapter 9 the legal concept of goodwill is examined in the broad-ranging context of the tort of passing-off. Goodwill plays a central part in the modern tort as the element of business to be protected from damage by the act of passing-off. As discussed in chapter 10, the field of compensation law presents certain treatments of goodwill which strictly run counter to its legal nature, particularly in respect of counting goodwill as part of land in calculating an amount of compensation. However, as explained in this chapter, this is no more than a deeming device for the specific purposes of calculating compensation and thus should not be taken to deviate from the normal concept of goodwill. Chapter 11 deals with goodwill in a number of tax contexts not covered elsewhere in this paper. The relationship between tax and goodwill has been an uneasy one with a degree of friction between the concept of goodwill and its tax treatment. The last of the chapters focussing on legal goodwill, chapter 12, addresses issues concerning valuation in the legal context. Chapters 13 and 14 deal with the accounting concept of goodwill. Chapter 13 examines the origin and development of goodwill. It plots the evolution of accounting goodwill from its recognizable beginnings in the 1880s to WWII. Chapter 14 carries on with the examination of accounting goodwill in the modern period, identified as the period after WWII with an emphasis on the time from the early 1980s. As noted in the conclusion to that chapter, the definition, valuation and treatment of accounting goodwill have changed little in substance from the earlier periods pre-WWII. The conclusion in chapter 15 is that goodwill is essentially the same concept in both law and accounting, but a compound concept comprising different facets which apply in different contexts. Therefore, the need strictly to determine a synthesis is rendered redundant by this concept of goodwill.