Goodwill key to Rover investigation

The notoriously difficult method of accounting for negative goodwill is likely to form a central plank of the investigation into MG Rover’s accounts by the Financial Reporting Review Panel, experts have claimed.

Link: FRC to investigate Rover

Insiders close to auditor Deloitte also said the issue of working capital would figure in submissions to explain why recent reports have raised the possibility of an accounting mismatch running into hundreds of millions.

Experts examining Rover’s accounts for Accountancy Age believe that a figure of £405.7m of negative goodwill, listed in notes to the 2003 balance sheet of Phoenix Venture Holdings, Rover’s holding company, could go some way to explain the widely reported but unproven hole in the company’s accounts. The figure resulted from the Phoenix Four’s bargain £10 purchase of MG Rover in 2000.

Negative goodwill arises when assets are acquired for less than their fair value. The difference between the purchase price and the fair value of an asset has to be recognised as negative goodwill and could, in some circumstances, be declared for tax purposes.

Although our analysis did not reveal any wrongdoing, or even errors, in MG Rover’s financial reports, the FRRP has examined the issue of negative goodwill before. On that occasion in 2002, discussions between Liberty International and the FRRP centred on the treatment of £193m worth of negative goodwill.

Recent reports in the press have claimed that an apparent ‘mismatch’ in the car maker’s accounts add up to more than £500m. The reports ultimately led to trade secretary Patricia Hewitt appointing the Financial Reporting Council and its agency the FRRP to look into Rover’s accounting.

Sir Bryan Nicholson, chairman of the FRC, said he hoped an initial investigation would be completed within four weeks, and that it would begin by concentrating on the company accounts before any directors were interviewed.

Nick Hood, senior partner at business recovery experts Begbies Traynor, said that while it was extremely unlikely the accounts would be found wanting, the 2003 report showed a business in serious decline.

He said that the £23.9m MG Rover spent on research and development, down from £78.2m the year before, was a ‘pitiful sum of money for a serious motor manufacturing company’.

Other signals that the company was in dire straits emerged as long ago as 2003 from the chief executive, Kevin Howe, himself. In his statement he said: ‘Capital expenditure at £41m equated almost exactly to depreciation of £45m and the effect on cash was therefore neutral.’

‘What he’s actually saying is that they were doing nothing more than standing still,’ said Hood.

Rover’s cash position was also relatively poor. Although it had more than £212m in cash, £113m of that was tied up. This would have made it very difficult to invest serious amounts of money and could explain why the company was so reliant on a white knight.

A spokesman for MG Rover, said the figures in question had been pored over by several accountants and the trade and industry select committee and that ‘on each occasion it has been given a clean bill of health’.

‘We had KPMG here over a number of weeks. Lets be quite clear here, these accounts have been looked at on a whole number of occasions, including being audited by Deloitte & Touche,’ he said.

A Deloitte statement said it was ‘satisfied with the opinion given in the financial statements’.