Accounting Standards - Shake-up on goodwill
The Accounting Standards Board today published a Financial Reporting Standard on goodwill and intangibles that will demand a major change in current practice.
FRS 10 Goodwill and Intangible Assets will apply to financial years ending on or after 23 December 1998, but the publication remains the subject of heated debate. ASB chairman Sir David Tweedie said: ?Given the sheer volume of numbers involved you can understand why it?s so sensitive.?
The document includes a dissenting view from ASB member Ray Hinton, a partner with Arthur Andersen. Other technical experts expressed concern that requirements to calculate losses of value – set out in a separate draft impairment test standard – are subjective and overly complex.
Instead of writing off goodwill against reserves, FRS 10 requires it to be capitalised and either amortised over a period of 20 years or less, or reviewed each year for any impairment. The stan-dard also establishes that intangible assets such as brands and licences should be accounted for in the same way as goodwill.
The ASB acknowledged that financial statements prepared under FRS 10 will report increased net assets, lower earnings and lower returns on capital employed.
In Hinton?s view, goodwill is not the same as an asset and FRS 10 charges operating profit with a meaningless cost. ?We will have cluttered balance sheet and income statements with numbers that users disregard or don?t believe,? he said.
KPMG technical partner John Kellas said the transition provisions and impairment testing would require careful study. ?Impariment tests will impart important information, where annual amortisation is a push-button exercise,? he said. ?We will know how good they are once we have some experience of them.?
