Merger relief allowed companies to recognise a merger reserve and use it to cancel goodwill, which would have otherwise been written-off to profit and loss reserve.
Following the introduction of FRS 10, ‘Goodwill and intangible assets’, writing goodwill off to reserves is no longer permissible.
Distributor Trifast has capitalised goodwill of £4m arising on acquisition with a consequent amortisation charge of £148,000 hitting the profit and loss account. However, having used shares to fund the acquisition, it uses 131 merger relief with a subsequent merger reserve arising. It then transfers an amount equal to goodwill amortisation from merger reserve to profit and loss reserve, nullifying the amortisation charge on profit and loss reserve.
In the past, some companies tried to mitigate the effect of goodwill on disposal. UITF 3, ‘Treatment of goodwill on disposal of a business’, required that the profit on disposal be calculated by including the amount of goodwill written off previously to reserves. To counter this, an amount equal to it was matched by an opposite reserve transfer. That practice was outlawed later by the UITF. Whether Trifast’s practice will suffer the same fate remains to be seen.
Although retrospective capitalisation of goodwill is FRS 10’s favoured transitional arrangement, the vast majority of companies continue to leave it languishing in reserves. The General Electric Company brings goodwill of £2.7bn back on to its balance sheet. Leisure company Zetters previously disclosed goodwill of £1.4m within reserves yet in the current year reinstates £0.4m back onto the balance sheet. The company tells us that the £1m missing tranche of goodwill related to payments made to secure the services of a director. However, as the director is no longer with the group, that goodwill no longer exists and therefore is not capitalised.
Renewals accounting is back
It has been common practice for companies not to depreciate infrastructure assets, but rather to provide for renewal costs relating to them. FRS 12, ‘Provisions, contingent liabilities and contingent assets’, abolishes this practice, as such provisions fail to meet its recognition criteria. However, FRS 15, ‘Tangible fixed assets’, has introduced a new approach that offers an amicable compromise.
Major transport companies Railtrack and Stagecoach de-recognise their renewals provisions on adoption of FRS 12. Following FRS 15, renewal expenditure is capitalised now as an addition to fixed assets, and subjected to a depreciation charge equivalent to the annual expenditure required to maintain the assets operating capability.
Although Railtrack transfers all of its provision to tangible fixed assets, £11m of Stagecoach’s are written-off as this part of the provision does not relate to owned assets. The interaction of the two standards ensures that companies can continue to spread renewal costs uniformly over the lives of infrastructure assets.
In contrast, the brewer HP Bulmer adopted previously a similar policy to Stagecoach and Railtrack for its cider installations.
This year, the provision is de-recognised with the assets now depreciated at rates between 10% and 25%.
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