Intangible assets have always posed valuation problems, and we are. used to seeing a variety of methods.
Molecular engineer Cambridge Antibody Technology acquired a US subsidiary that carried patents as a #50,000 intangible asset. On acquisition, a fair value exercise was carried out that increased the value of these patents to #5.4m, ensuring that no goodwill was recognised.
FRS 7: ‘Fair values in acquisition accounting’ requires intangibles to be recognised at replacement cost,which is taken normally to be estimated at market value. Cambridge Antibody Technology tells us that as the patents were the most significant asset acquired, their market value equates to the consideration paid. To complicate matters further, consideration is paid in instalments of shares. As the value of Cambridge Antibody Technology’s shares fluctuate, so does the fair value of consideration and, by tortuous logic, the value of the patents.
This year, a fall in the company’s share price led to a #0.8m impairment to the intangible asset. While Cambridge Antibody Technology may have followed a logical path, the end result is an intangible asset value that is dependent (in part) on the share price of the company purchasing it.
Goodwill – could do better
In 1992, the Urgent Issues Task Force (UITF) issued a clarification note on how the requirements of UITF 3 ‘Treatment of goodwill on disposal of a business’ should be applied – so frustrated was it with companies’ misinterpretations.
Some seven years later, however, lapses in practice suggest it may need to issue another one.
Distributor Diploma wins no awards for its presentation on the face of the profit & loss account of a net loss on business disposals. In exactly the type of presentation that galvanised the UITF into issuing its clarification note in the first place, Diploma presents the goodwill element as an adjustment to ‘surplus of proceeds over net asset value’ rather than as an integral part of the calculation of gain or loss. The impression given (backed up by similar presentation in the chairman’s statement) is that a gain on disposal has been adjusted by an accounting technicality, which is far from being the case.
It is not all bad news for advocates of UITF 3, though, as WH Smith gives a copy book interpretation of its requirements. Its p&l account includes a net #122m ‘profit on sale of operations’ which is cross-referenced to a note to the accounts that shows clearly how goodwill has been included as part of the calculation.
Bucking the trend
It has been suggested the end is nigh for the non-depreciation of property assets, as companies are ditching the policy in anticipation of FRED 17: ‘Measurement of tangible fixed assets’ evolving very soon into a full FRS.
While the number of companies not depreciating all of their tangible fixed assets has dropped still further to 13%, not all are content to move with the herd.
Morland, one of several brewing companies reporting this month, discloses in both its financial review and accounting policies note that short leasehold properties with a non-expired lease term of more than 25 years are no longer depreciated.
Non-depreciation has long been a thorn in the flesh of the Accounting Standards Board. It may well have been delighted with Slug and Lettuce’s decision last month to begin depreciating freehold property, but will be less than happy with this policy move of Morland.
FRS 13 given frosty welcome
Not many companies are rushing to adopt early FRS 13: ‘Derivatives and other financial instruments: Disclosures’, and property company MEPC perhaps gives us one reason why this is the case.
In MEPC’s financial review, the company makes clear its displeasure at the impending requirement to disclose the ‘mark to market’ value
of debt. Describing mark to market values as ‘somewhat theoretical’, MEPC explains that such values move daily and do not constitute a certain liability. The company calculates and discloses the mark to market value against book value of its interest rate derivatives – telling us the resultant pre-tax figure of #58m represents the cost that would have been incurred had all interest-rate swaps been cancelled as at the year-end.
Computer company Network Technology modifies its accounting policies in line with the much overrated fundamental concept of prudence, with its p&l account suffering the consequences.
Formerly, Network Technology capitalised development costs and office establishment costs, but both are now charged to profit as incurred. In its accounting policies note the company provides a table that shows clearly the impact on reported profit: a reduction of #937,000 this year and #566,000 in the comparative period.
Shareholders of WH Smith have received a belated Christmas bonus – two sets of accounts for the price of one.
WH Smith has changed its year-end from May to August in order to avoid having to produce interims during a time of peak trading. As a result, the 1998 accounts cover a 15-month period, but have comparatives for the 12 months ending May 1997.
To allow for better comparability, the company provides a full set of pro forma accounts (including notes) covering two 12-month periods ending August 1997 and August 1998. While pro forma accounts are fairly common tools, we are not used to seeing such a comprehensive set as WH Smith’s.
Additional eps figures
Companies often publish an additional pre-exceptional earnings per share (eps) figure when profits have been hit by a material exceptional charge, but this month we find a company publishing one when it has no exceptionals to report.
Business support company Dawson Holdings publishes a pre-exceptional eps that is no different from its basic eps, in stark contrast to last year when profit was boosted by an exceptional credit of #2.4m but no pre-exceptional eps was provided.
The company tells us the additional eps was introduced for comparative purposes – to show that this year’s fall in eps is due to last year’s eps being artificially increased by the exceptional credit. Strange that the company did not highlight this artificial boost to eps in the 1997 accounts proper.
This feature is an edited version of the review published in ‘Company Reporting’ magazine, a monthly title monitoring financial reporting practices in the UK. Details from: 0131 558 1400.
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