Company Reporting - Kingfisher dives in

A unique approach to business combinations is taken this month byot between B&Q and Castorama. Kingfisher, which accounts for its Castorama transaction as an exchange of assets rather than as an acquisition or a merger. During the year, Kingfisher transferred to Castorama its 100% holding in B&Q in exchange for a 57.9% interest in the enlarged French group.

Kingfisher views this transaction as an exchange of assets and adopts an accounting treatment which differs from that outlined in FRS 6: ‘Acquisitions and mergers’ and FRS 7: ‘Fair values in acquisition accounting’.

As disclosed in the report’s acquisitions note, consideration is calculated as 42.1% (rather than 100%) of B&Q’s net assets, with the fair value of assets acquired taken as 57.9% of Castorama’s assets prior to its receipt of B&Q.

The difference between the two amounts, some £146m, is not capitalised as negative goodwill because Kingfisher views it as a revaluation differential. Instead, it is labelled ‘non-distributable reserve arising’ and credited to reserves.

The company says that – in the absence of a standard that deals with such transactions – there is no need for the true and fair override to be invoked. But it will be a surprise if analysts accept this view uncritically.

Still no goodwill consensus

One benefit of the introduction of FRS 10: ‘Goodwill and intangible assets’ should be that there are no longer two conflicting methods of accounting for goodwill. Unfortunately, the new standard gives companies a choice of two distinct transitional arrangements. No consensus has been reached on which arrangement is best and practice remains split – to the detriment of comparability.

Alliance UniChem adopts the most popular of the two options and leaves old goodwill languishing in reserves. FRS 10 does not permit a separate goodwill reserve to be recognised, and most companies respond to this by transfer-ring the balance of the good-will reserve to the profit & loss reserve. But, in a similar fashion to Kenwood Appliances, Alliance UniChem transfers £210m of its share premium account into a special reserve which is then used to cancel the goodwill reserve.

United News & Media adopts FRS 10’s favoured option, capitalising retrospectively goodwill that was written off previously to reserves. The company capitalises £1,242m of goodwill, and the associated amortisation charge of £167m illustrates the main reason why this approach has not proven too popular.

Intangible inconsistency

FRS 10: ‘Goodwill and intangible assets’ introduces tough new recognition criteria for intangible assets, resulting in the inconsistent treatment of acquired intangibles compared with those generated internally.

Mirror removes from its balance sheet £625m of internally generated publishing rights as they do not have a ‘readily ascertainable market value’ as defined by FRS 10. At the same time, it capitalises some £14m of acquired publishing rights under the approving eye of the same standard. This inconsistency is alluded to also in the accounts of Guiton which discloses on capitalising £15m of acquired newspaper titles that those owned already by the group are not included in the balance sheet.

Another convert to US dollars

Two multinational companies – BP Amoco and Royal Dutch/Shell – ditched sterling last month in favour of reporting in US dollars. This month, HSBC follows suit – the first company in the financial sector we have seen do so. HSBC’s financial review justifies the decision by explaining that the US dollar and linked currencies form the main currency bloc in which it operates. Although the US dollar is now the prime reporting currency for HSBC, the balance sheet and p&l account are also presented in sterling and Hong Kong dollars.

Annual reports have been slow to reflect the introduction of the euro, with only a handful making financial disclosures in the new currency. This month, both Bank of Scotland and Alliance UniChem join this select group.

Alliance UniChem adds a euros column to its p&l account, balance sheet and cash-flow statement. The figures have been translated into euros using published EMU rates and are not embraced by the auditors’ report.

Bank of Scotland provides a summary p&l account and balance sheet in euros at the tail-end of its notes to the accounts.

While its disclosures are not as extensive as those of Alliance UniChem, they still stand out from the herd.

Taxation boosts profits

It is not often that companies report good news on the taxation front, but this month proves to be an exception as both Kingfisher and Next see their profits boosted by favourable VAT appeals.

Last year, in response to Customs & Excise withdrawing a particular method of calculating VAT amounts due, Kingfisher created a £45m accrual but the company immediately set about appealing against the decision. The appeal proved successful and the accrual is released this year, classified as exceptional income and included in the p&l account in arriving at operating profit.

It is a similar story at Next, which suffered last year when a change to VAT legislation resulted in an extra £8m being paid, calculated on outstanding Next Directory debtors. Like Kingfisher, the company appealed successfully against the change and includes the resulting refund in the p&l account as an exceptional credit to cost of sales.

Pro formas move ahead

We recently reported that WH Smith had produced perhaps the most extensive set of pro forma accounts we had seen, but this month music company Boosey & Hawkes tops even that.

During the year, Boosey & Hawkes underwent a major reorganisation, transferring all of its assets to a new holding company. As merger accounting was not available, its statutory accounts begin on the date of the reorganisation and include no comparative figures.

It is common in such cases for companies to provide pro forma comparatives, but Boosey & Hawkes goes a stage further and publishes a separate pro forma annual report that looks more like a statutory annual report than the statutory report itself.

The above analysis is drawn from the latest issue of Company Reporting magazine, a monthly title monitoring financial reporting practices in the UK. For subscription details telephone 0131 558 1400.