Almost £21bn of M&A activity recorded under IFRS by FTSE 100 companies
was put down to goodwill, a situation that hoodwinks investors, according to the
world’s largest independent brand valuation consultancy.
Following a record year in the M&A market, Thayne Forbes of Intangible
Business said: ‘The FTSE 100 spent £40bn of shareholders’ money on acquisitions
last year and failed to explain what over half of this expenditure was for.
‘IFRS 3 was designed to demonstrate to investors how their money was being
spent on acquisitions. Our research clearly lays bare the fact that the UK’s
major companies, from banks to retailers and insurance companies to TV networks,
are systematically failing to comply with IFRS 3. As a result the accounting for
business acquisitions is still opaque, and creative accounting is still
occurring.’
The survey covered 88 of the FTSE 100 which filed in the first year of IFRS
up until March 2006.
The remainder had either not filed or were reporting under different
standards. The Intangible Business MD put a ‘back of the envelope’ figure of
£80m on the amount that had been spent on companies’ efforts to comply with the
business combinations standard: ‘The specialist skills needed to undertake the
implementation of IFRS 3 has cost these companies an estimated £80m. We consider
that these are largely wasted costs given the lack of usefulness of the
information.
‘This may be because this is the first year of adoption of IFRS 3 and there
has been a learning curve. We consider that now is the time to address how these
resources will be deployed going forward to ensure that the benefits provided
are in proportion to the costs incurred.’
Forbes believed that the under-reporting of intangible assets such as brand
name and customer base, coupled with the high levels of value in goodwill and
the general lack of disclosure made it difficult for shareholders to assess
whether the acquisition had generated any value for the company, pinpointing the
reason for the situation.
‘Higher levels of intangibles lead to greater amortisation charges in a
company’s profit & loss balance sheet and a larger exposure to impairment
charges in the future. The tests for impairment on intangibles have become much
more stringent, so it’s clearly a sensitive area. Impairment charges are always
badly received by shareholders when an unexpected loss is made in an acquired
asset.
‘The most important step is for companies to stop taking refuge in the
previous accounting climate, which said, “goodwill can’t be explained” I think
that the factors contributing to goodwill can be detailed to a greater extent.
‘Intangibles should also not be given some understated value that can’t be
understood by someone that knows the application of the brand in the market.
There’s a danger that this might set a precedent, so the situation needs to be
addressed.’
Forbes concluded: ‘If these regulations are to have a significant impact on
company reporting, it is clear there needs to be a body with specific
responsibility for policing IFRS 3, like the SEC does in the US. IFRS 3 has
opened a new era of creative accounting and I can only hope that this report
serves as a catalyst for improvements.’
COMPANY REPORTS
Former Siemens CFO a suspect in bribery case
An investigation into a massive bribery scandal at German engineering giant
Siemens has resulted in its former CFO being named as a suspect by public
prosecutors in Munich. Heinz-Joachim Neubürger, who stepped down in April after
being passed over for the chief executive role, was named as a suspect in the
inquiry into the E420m (£278m) scandal. Current head of Siemens, Klaus
Kleinfeld, warned that the probe threatened the company’s survival.
AIM groups hot on acquisition trail in 2007
More than two-thirds of AIM companies are planning acquisitions in the year
ahead, says a new survey. Over two-thirds of companies listed on the junior
exchange are eager to make acquisitions over the next year a review by Smith
& Williamson has uncovered. In a poll of 73 senior decision makers at AIM
companies, Smith & Williamson found that 70% of the respondents expected to
make an acquisition in 2007.John Cowie, head of AIM at Smith & Williamson,
said the findings showed that AIM businesses were buoyant and confident.
‘When business confidence is high, the M&A market thrives. There is
obviously some correlation between optimism about the future and the desire to
make acquisitions companies are clearly looking to make use of AIM to
facilitate this,’ Cowie said.
Interserve shells out £8m for investigation
Interserve paid £8m for investigations into accounting misstatements at its
industrial services arm. Adrian Ringrose, chief executive of the services,
maintenance and building group, said the legal and forensic accounting charges
related to industrial services, were higher than the £5m suggested at the
interim results but that the charges were now materially over, the Financial
Times reported last week. Interserve was left red-faced after irregularities in
its industrial services unit came to light, which led to the write-down.
The mistakes related to the entering of invoices into the company’s
accounting system, which were subsequently destroyed. Interserve’s interim
results, delayed after the accounting errors, showed pre-tax profits of £23.1m
after the necessary adjustments were made, compared to £14.1m last year.
After a review by KPMG and Linklaters in October last year, Ringrose said
there would be no further write-downs and the irregularities had only affected
the industrial services division. Six senior managers of the department still
face the prospect of disciplinary action in the wake of the scandal.
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