Goodwill FRS hammers IT

New financial reporting requirements for goodwill fail to meet the needs of the technology industry, Aidan Hughes, finance director of Newcastle-based accountancy software specialist Sage, said this week after agreeing the company’s #88m acquisition of Peachtree Software.

Over one million customers use US accounting specialist Peachtree’s small business accounting software, which made the company an ideal target in Sage’s strategy to boost its US user base.

Hughes said there was an ‘element of opportunity’ in the run-up to Sage’s bid, but that the company was always looking to acquire businesses where it could add value – ‘particularly to provide customers with increasing levels of support’.

The Peachtree acquisition follows that of State of the Art, which became a part of Sage’s US empire last March, in a #233m deal. The introduction of FRS 10: ‘Goodwill and Intangible Assets’ – which applies to financial years ending after 23 December 1998 – could mean, however, that goodwill charges resulting from the two acquisitions will be accounted for differently.

FRS 10 does not require previous acquisitions to be restated under the new rules. ‘It’s an accounting quirk that means accounts can recognise goodwill in two places: as a reserve debit or as an asset on the balance sheet,’ said Hughes.

‘It’s a bizarre situation that can make it difficult to interpret the values shown in the balance sheet.’ The company has not yet decided how it will reconcile the two acquisitions, said Hughes, but would wait to see what standards evolve over the year in the IT market.

‘Recognising and valuing goodwill is difficult in emerging industries like technology, where it can be very hard for us to apply an arbitrary cut-off point,’ said Hughes. ‘We believe those things are very judgemental, and standards that are quite general don’t necessarily meet all needs.’

IT File, page 17.

Related reading