BusinessCorporate FinanceCompanies urged to shine light on goodwill

Companies urged to shine light on goodwill

FRC urges companies to pay more attention to their goodwill stress-testing to avoid impairment charges on the value of M&A deals

Thayne Forbes, joint managing director of Intangible Business

Important step: Thayne Forbes

The Financial Reporting
Council
has called for companies to ramp up their goodwill stress-­testing
in an effort to avoid impairment charges on the value of M&A deals.

The watchdog urged companies to pay more attention to their disclosures after
seeing a hike in impairment charges as businesses write down goodwill: ‘We have
already seen an increased incidence of goodwill impairment charges and that
trend is highly likely to continue.’

Responding to the tough market conditions, the FRC reviewed the goodwill
impairment disclosures made by a sample of UK companies and found the bulk of
them were providing boiler-plate disclosures.

‘The review found that the most useful and informative disclosures were those
that provided information specific to the business,’ the FRC said. ‘It also
concluded that the majority of companies disclosed more generic than specific
information, which limited the understanding and insight that could have been to
investors.’

The regulator probed goodwill impairment disclosures in 2007 by 32 UK listed
companies and assessed the completeness and clarity of statements being made in
efforts to comply with international financial reporting standards.

Goodwill has long been a thorny topic as some companies have lumped the bulk
of M&A deal value into it, leading to the idea that they may have overpaid
for acquisitions.

Accounting experts have said 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 makes it difficult for shareholders
to assess whether acquisitions had generated the expected value for businesses.

Thayne Forbes of Intangible Business said: ‘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 goo
dwill can be detailed to a greater extent.’

As economic conditions have deteriorated, the FRC believed it underscored the
importance of the information that companies disclose about goodwill and
goodwill charges. The regulator warned it was likely many companies will need to
reduce their forecasts of future growth and operating margins.

Ian Wright, director of corporate reporting at the FRC, added: ‘Many
businesses will find that deteriorating economic conditions have triggered the
need for additional disclosures required by IFRS in respect of goodwill.
Investors and other users of financial statements are likely to find these
disclosures particularly useful in the coming months.’

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