RegulationAccounting StandardsM&A recovery puts intangible asset valuations in spotlight

M&A recovery puts intangible asset valuations in spotlight

FRRP to keep an eye on the use of IFRS3 as acquisitions increase

The financial reporting regulator will begin cracking down on reporting
practices of companies that hope to expand in the slowly stabilising economy.

The Financial Reporting Review Panel (FRRP) expects an increase in business
acquisitions as the recovery gathers pace and is planning a parallel rise in
companies wrestling with accounting rules aimed at disclosing non-physical
assets.

Ian Wright, director of corporate reporting at the Financial Reporting
Council, said the panel would target 20 companies and take a close look at how
they documented the acquisition of intangible assets. He would not identify the
companies except to say “those that made significant acquisitions in 2008 and
2009.”

At the heart of the issue is accounting rule IFRS 3, which forces companies
to recognise intangible assets, such as goodwill, contact lists, licenses and
trade marks, when they acquire a business.

Notoriously difficult to value, intangible assets are sometimes written off
as goodwill or measured at arbitrary prices. As the economy stabalises and
expansion plans come off the back burner, the FRRP fears companies will not
disclose their intangibles adequately.

“We are about to come back into a period when there are more business
acquisitions and we are saying “be careful with this, it is really important
this year’,” he said. “We are asking companies to think carefully about their
explanations.”

If the investigation turns up anything “seriously wrong” further steps will
be taken, Wright said.

Companies have used IFRS 3 since 2005, however the financial crisis
interrupted any real test of the rule. Wright believes companies are now coming
to grips with the rule for the first time as they take advantage of improved
economic conditions.

“There’s not a lot of experience,” he said. “Although it came in the 2005
year end, many companies did not make acquisitions then due to the crisis.”

The FRRP fired a warning shot at businesses last week. On 1 October,
investment management firm Brewin Dolphin Holdings had to knock £2.2m off the
value of its assets, after it failed to properly disclose client relationships
separately from goodwill.

An FRRP statement said Brewin had not separated customer-related intangible
assets when it purchased investment management businesses.

PricewaterhouseCoopers senior technical partner Peter Holgate said some
companies struggle to put a fair value on intangibles. “One answer is to say we
don’t know how to value it so lets call it goodwill ­ that isn’t really
credible, so you need to do an exercise which comes to a fair value,” he said.
“You can’t really justify [an intangible asset valuation] in the same way you
can with other assets… there is a range of possible, but credible answers.”

IN OUR VIEW

It’s the intangibles that make companies successful, so it’s no surprise
they can be the most pricey assets in an acquisition. It may be hard to reach an
objective valuation, but that’s no excuse not to try.

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