Goodwill challenge

A tumultuous 12 months for British Petroleum and its chief financial officer, John Buchanan, comes to a head today at the company’s annual general meeting in London.

After merging with US producer Amoco earlier this year to form BP Amoco, the company announced at the beginning of this month it would be growing again. This time, it is acquiring Los Angeles-based Atlantic Richfield (Arco) in a $26.8bn (#16.3bn) deal.

In reality, the agm should be a quiet affair, with auditors Ernst & Young and existing company directors expected to be re-appointed. The real test is yet to come: an emergency general meeting slated for later this summer will consider the Arco takeover.

If ever accounting issues lay at the heart of a major corporate deal, it is this one. BP Amoco recognises it will not be able to take advantage of the more generous allowances that merger-accounting rules permit. FRS 6 rules out accounting for the deal as a merger on the grounds of the disparity in size between the two operations: BP is worth $120bn, while Arco is worth a comparatively paltry $21bn.

The company knows that it would be fighting a losing battle in arguing that the deal is anything other than an acquisition.

In the documents published to accompany the announcement of the deal, the tie-up would, the company said, be ‘accounted for as an acquisition under UK GAAP’.

The potential goodwill hit that acquisition accounting generates is large enough to threaten the likely savings from the tie-up. BP Amoco could have to write off up to $20bn of goodwill over the remaining life of Arco’s oil reserves – as much as $1.5bn a year.

Given the figures’ size, Buchanan – a non-executive Boots director, Accounting Standards Board member and BP executive director since 1996 – faces a challenge to make the merger work in financial terms.

Reflecting its trans-Atlantic structure, the new company will report in US dollars, despite adopting UK GAAP. It will also provide supplementary US GAAP information.

To ease comparison before and after the deal, underlying earnings will be stated on a pre-deal amortisation basis.

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