Goodwill reserves may well be banished from the balance sheet, but at least they can live on in the notes to the accounts. While FRS 10: ‘Goodwill and intangible assets’ is clear any goodwill remaining in reserves should not be disclosed separately on the face of the balance sheet, this requirement is not extended to the notes to the accounts.
Belhaven Brewery takes advantage of this and maintains a goodwill reserve in the notes to the accounts, aggregating it with the profit & loss reserve for presentation on the face of the balance sheet. Given that FRS 10 requires goodwill reserves to be offset against other reserves on the balance sheet, it could be argued this practice is inappropriate. But, if the Accounting Standards Board wants to eliminate goodwill reserves, then FRS 10 would require retrospective capitalisation. Instead, FRS 10’s transitional arrangements give companies the choice, and Belhaven’s reserves note clearly discloses which path it has taken and how much goodwill remains in its reserves.
Belhaven’s reserves note can be contrasted with that of packaging company Rexam. Like most companies, Rexam transfers the balance on its goodwill reserve into the p&l reserve as a prior year adjustment, removing it forever from both the balance sheet and the notes to the accounts.
The transfer leaves Rexam with a negative p&l reserve, illustrating another reason why Belhaven’s approach may appeal to other companies.
Onerous provisions Raising provisions for contracts that are calculated to be a net cost to the company is not a common feature of UK accounts. At present, only 3% of companies provide for onerous contracts, but it is becoming more common as the requirements of FRS 12: ‘Provisions, contingent liabilities and contingent assets’ take effect.
This month, three companies provide for onerous contracts after adopting early the new standard. Whitbread discloses that it has adopted FRS 12 and, as a result, onerous contract provisions of £8m have been reclassified from fixed assets. Cable & Wireless provides £59m for the onerous element of television programming contracts and building supplies company BSS recognises onerous contracts arising on surplus properties.
In the case of BSS, onerous contract costs were previously charged to profit as incurred, but the new policy follows FRS 12 by providing for the £2.8m net present value of the obligations.
FRS 15 predictions borne out We have been predicting for some time that the requirements of FRS 15 ‘Tangible fixed assets’ will prompt more companies to carry properties at depreciated historical cost and fewer companies to revalue them. The new standard is not effective until accounting periods ending on or after 23 March 2000, but the evidence from early adopters is that our predictions are proving well founded.
Livestock auctioneer UA adopts FRS 15 early and, as a result, elects to ditch its revaluation regime and revert to historical cost. At the same time, the company drops its policy of not depreciating buildings and begins depreciating them at rates varying from two to 20%. Although FRS 15 does not prohibit revaluations, it introduces a much tighter revaluation regime that may well accelerate the recent trend back to historical cost. Unmodified historical cost is the stated policy of 44% of companies with accounts published so far this year, compared with 33% for the comparable period in 1996.
Introducing EBITDA P&l accounts continue to strain under the weight of information that companies are intent on cramming into them. This month, we see some innovation as two companies include a figure for EBITDA (earnings before interest, taxation, depreciation and amortisation) on the face of their income statements.
In order to incorporate an EBITDA figure on the face of its p&l account, construction company Andrews Sykes includes the operating profit figure twice – arrived at in two different ways. This may assist analysts, but the result is a somewhat cluttered presentation.
Cable & Wireless manages to disclose EBITDA without duplicating the operating profit figure, stating in its accounting policies note that EBITDA is a standard measure reported widely and used commonly by analysts, investors and other interested parties in the telecommunications industry. This does indeed appear to be the case, although our analysis of the telecommunications services sector finds that C&W is the only company to disclose it on the face of the p&l account.
Segmental disclosures We have expressed concerns in the past that the requirements of SSAP 25 ‘Segmental reporting’ are rendered effectively optional by the availability of the prejudicial override. So analysts will be glad to see two companies this month drop their use of the prejudicial override and expand their segmental disclosures.
Last year, both computer distributor ilion and software company Acorn analysed turnover geographically but invoked the prejudicial override to avoid making other SSAP 25 disclosures. This year, the overrides are dropped and ilion provides a geographical analysis of operating profit, exceptional items and profit before interest and tax. Meanwhile Acorn analyses turnover and gross profit across four classes of business.
Hopefully, ilion and Acorn represent the beginning of a trend, and segmental disclosures are set to improve.
More VAT good news Following on the heels of Kingfisher and Next, clothing retailer Austin Reed becomes the latest company to report good news on the VAT front.
A Court of Appeal ruling has led to VAT repayments being made to companies that operate self-financed credit card schemes, enabling Austin Reed to boost its p&l account with exceptional operating income of £867,000.
This is an edited version of an extract from Company Reporting, a monthly title monitoring financial reporting practices in the UK. For subscription details call 0131 558 1400.
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