Frantic attempts by British Aerospace to account for its #7.9bn acquisition of the defence arm of GEC as a merger are expected to fail, hitting the company’s profits by #350m as a result.
Accountants and analysts said this week they did not expect the company to be able to adopt merger accounting principles in booking the deal, which values GEC Marconi’s goodwill at about #7.6bn.
Merger accounting rules would allow the company to account for the deal as a pooling of interest. But, if BAe was forced to account for it as an acquisition, it would have to put the goodwill on the balance sheet and amortise it.
That amortisation would hit pre-tax profits to the tune of #350m a year, according to analysts.
A source close to the Accounting Standards Board said: ‘FRS6 sets out a series of tests for whether or not you should account for such a deal as a merger or acquisition. The central point is whether you can identify an acquirer. It would seem to apply in this case.’
A corporate finance specialist at a Big Five firm said: ‘Like all these things, they will push for merger accounting if at all possible.’
But an analyst at a City bank warned: ‘They would love to get away with merger accounting but I don’t think that anybody really expects that to be the case.’
British Aerospace finance director George Rose, who has been in talks with auditors KPMG, has hinted that a decision could be made as early as next week.
Report argues that the government must change the way it makes tax and budget decisions
Drastically fewer offices for HMRC in the hope to reduce their running costs
Tayabali Tomlin and d&t directors launch £20 a month TaxGo service, aiming to be the 'biggest UK firm' by client numbers
Companies must report on their complex financial structures including offshore accounts and notify HMRC