The Big Question - FDs shun merger accounting
Almost one in four UK finance directors believes merger accounting should be banned outright.
When one company combines with another, applying merger accounting allows it to avoid recording goodwill as an asset. If goodwill was recorded, it would be amortised and reduce profits. In the case of British Aerospace taking over GEC Marconi, the hit to profits could be #350m a year (11 February).
In this week’s Accountancy Age/Reed Accountancy Personnel Big Question survey of 200 finance directors, some respondents cited past abuses to back their call for the scrapping of the treatment, while others said it would simplify business combinations. ‘As there is usually a dominant partner, the practice should be banned on ethical grounds,’ said one FD.
‘It is open to too much abuse,’ said another.
Another said: ‘Practicalities make life very different whereas normal acquisitions are straightforward.’
Supporters of merger accounting – who numbered one-third of respondents – said it was acceptable, but companies should follow the rules. ‘I don’t see why companies should not be merged as long as they are merging in a true 50:50 partnership,’ said one.
International Baccalaureate FD Stuart Chapman called on the Accounting Standards Board to work on ‘clarifying and simplifying the rules governing merger accounting’.
He added: ‘If organisations cannot or will not work to the rules, they will not be able to utilise merger accounting.’