Company Reporting – A question of goodwill.

Capitalisation of goodwill is soon to become mandatory under the requirements of FRS10: Goodwill and intangible assets, effective from accounting periods ending on or after 23 December 1998. Capitalisation is permitted under SSAP22: Accounting for goodwill, but analysis of our database shows that currently only 3% of UK companies adopt such a practice – despite this change having been in the pipeline for some time.

One company that partly meets the pending requirements of FRS10 is electrical manufacturer Graystone. The company has a twin-track policy that involves capitalising any goodwill defined as ‘non-core’. In accordance with this policy, goodwill arising last year on an acquisition was capitalised with the intention of amortising it over 20 years (which FRS10 presumes to be the maximum economic life of purchased goodwill).

This year, however, Graystone has reviewed its position and, due to the continued losses of the subsidiary, has recognised the full impairment of the capitalised goodwill and charged it to profits.

This approach is in tune with the FRS10 requirement that impairment reviews be carried out at the end of the first full financial year following the acquisition, if circumstances indicate that carrying values may not be recoverable.

More companies revert to historical cost

The recent publication of FRS10, hand in hand with the impending evolution into full standards of FRED 15: Impairment of fixed assets and goodwill and FRED 17: Measurement of tangible fixed assets, ensures that measurement issues will dominate the accounting agenda for the foreseeable future.

The proposals of FRED 17 will make revaluing a less attractive policy, which may result in a trend emerging for companies to revert to historical cost. This month, we discuss two companies that have done so.

Following an appraisal of operations Graystone has decided to focus on its distribution business and, as part of the process, has reduced to estimated realisable value the carrying value of several properties earmarked for disposal. As a result, the accounts no longer include any revalued tangible fixed assets.

Textile company Hollas has been carrying revalued fixed assets in the balance sheet at their 1981 valuation. This year, the schedule of tangible fixed assets shows that a proportion of freehold and almost all long leasehold land and buildings have been disposed of, with the remaining assets being included in the accounts at cost.

Holding ‘revalued’ assets in the accounts which have not actually been revalued for many years is a common practice that FRED 17 wishes to eliminate.

Under its proposals, once a company has decided upon a policy of revaluation for a class of assets, a full valuation should be carried out at least every five years, with an interim valuation in year three. Furthermore, interim valuations are proposed for years one, two and four if events indicate there has been a material change in value.

It seems that the cosy days of revaluing an asset at the height of a property boom and leaving it in the accounts indefinitely are numbered.

Related party comparatives

As is the way with most new standards, the initial flurry of varied practice that met the publication of FRS8: Related party disclosures has settled down into consistent, homogeneous practice.

But this month, Associated British Foods shows it is still possible to provide an unusual but impressive set of disclosures that may lead general practice onto a higher plane.

Most UK companies, including Galaxy Media, group all of their required FRS8 disclosures in a dedicated related party note. Associated British Foods follows this practice, but delivers even more quality information to analysts by providing 1996 comparative figures.

The Companies Act 1985 requires that, apart from specific exceptions, comparatives be given for ‘every item stated in a note to the accounts’ (schedule 4, part III, para 58). Items disclosed under the provisions of schedule 6 parts II & III of the Act, which are concerned with loans and other dealings in favour of directors and others, are one exception.

Although such items form the majority of related party transactions, FRS8 captures other types of transaction for which, arguably, comparatives should be given.

Whether required or not, Associated British Foods is providing useful information to analysts and we hope more companies will follow suit.

Pensions disclosures that reveal nothing

While it is understandable for preparers of accounts to assume a reasonable level of knowledge among users of financial statements, it is perhaps a bit much to expect them to hold actuarial qualifications. But that seems to be what is required to glean an estimate of transfer values from many annual reports.

Companies with accounting periods ending on or after 1 July 1997 are required by the Stock Exchange listing rules to disclose separately the transfer value of the increase in accrued pension benefit to which each director has become entitled during the year, or sufficient prescribed information to enable a reasonable estimate of it to be made. Both carpet manufacturer Tomkinsons and property company Bett Brothers include transfer value figures in their tables of directors’ pensions.

Taking the alternative approach, Wolverhampton & Dudley Breweries and property company J Smart disclose prescribed information that is meant to enable analysts to make a reasonable assessment of transfer value increases for themselves.

Quite how a non-actuary is meant to do this is unclear.

Supplier payment flaw

The introduction of the requirement to disclose the average number of days’ credit outstanding at the end of the year seems to be a step forward. Supplementing the bland and pointless supplier payment policies that companies tend to produce with some quantifiable information is a laudable aim.

Unfortunately, the Companies Act (directors’ report) (statement of payment practice) Regulations 1997 has a major flaw: it requires disclosure in respect of the company, not the group as a whole.

Galaxy Media points out that, especially with regard to holding companies, such information is pretty meaningless. The company chooses instead to disclose that its principal subsidiary had 33 days credit outstanding at the end of the year. It will be of value to analysts if other companies decide also to take such a commonsense approach, rather than adhering slavishly to the letter of the law.

The year in retrospect

This edition’s Issue of the Month is devoted to our annual review of the year, in which we discuss the trends and highlights of 1997.

This is an edited version of the review published in Company Reporting, a monthly publication monitoring financial reporting practices in the UK. Company Reporting is available on subscription. Details from Company Reporting, 0131 558 1400.

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