It is interesting to compare the accounting changes coming from the Accounting Standards Board (ASB) with the changes in government accounting that are now starting to come through.
The latest accounting standard to emerge from the ASB is the FRS10: Accounting for goodwill. The recommendation means that purchased goodwill can be included in the balance sheet but any self-generated goodwill is to be omitted.
FRS10 clutters balance sheets with items that are neither severable as assets nor can be easily revalued.
It encourages accountants to describe something as an asset which in reality is simply the difference between the valuation of business as a whole and the sum of the assets valued individually.
The standard does not even measure up to the ASB’s own principles. If individual users of financial statements are rational decision-makers, as the ASB’s Statements of principles seems to suggest, then the ‘users’ need to know what kind of resources are deployed to generate earnings and cashflow.
Published research shows that once values have been assigned to items, little of what is described as ‘goodwill’ remains. To label things as ‘goodwill’ rather than the specific market, location and other advantages, may mystify financial statements and institutionalise the production of misleading financial statements.
By giving companies 20 years to amortise goodwill, the ASB may have reached a temporary compromise with major companies. It minimises charge to the income statement and might pacify the executives whose salaries are linked to published profits.
In the government sector the results of the move towards resource accounting are starting to come through. It is good to see the Financial Reporting Advisory Board pushing the Treasury and the government machine on such issues as the full disclosure of salary and pension arrangements and how to deal with the tangles of PFI.
As an MP, I want to see this pressure relentlessly kept up. That is why the ASB should be bolder on accounting for goodwill and the private finance initiative.
Accounting for goodwill extended to government – that really would be a challenge.
Jim Cousins is the Labour MP for Newcastle Central
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