Goodwill reserves were expected by many analysts to be banished forever following the introduction of FRS10 ‘Goodwill and intangible assets. FRS 10 does not force retrospective capitalisation of goodwill written off previously to reserves but does state that, if goodwill remains offset against reserves, it should not be shown as a debit balance in its own right. Sanctuary, the media services company, although capitalising goodwill arising during the year, as required by FRS10, leaves previous year’s goodwill in a separate goodwill write off reserve. Sanctuary tells us it has a substantial amount of goodwill tied up in reserves and its policy to disclose a separate goodwill reserve demonstrates the value of goodwill which has been written off previously. It is not clear why FRS10 is so insistent upon eradicating goodwill reserves and, given Sanctuary’s justifications for maintaining such a reserve, the elimination of goodwill reserves appears to hinder transparency. However, next year Sanctuary plans to transfer its goodwill reserve to profit and loss reserve in keeping with the requirements of FRS10. Pro forma accounts Pro forma accounts are a useful tool for those companies wishing to show an alternative view of the business, especially on an ‘as if’ basis. Both Securicor and Lloyds TSB publish pro forma information in their operating and financial reviews. Securicor’s pro forma statement illustrates the effect of its disposal of Cellnet, excluding it from the p&l account and balance sheet for this year and last year. Lloyds TSB also publishes a pro formas which shows the effects on its activities had its acquisition of Scottish Widows occurred at the start the financial year. Unfortunately, neither statement is included within the scope of the auditors’ report. If analysts are expected to rely on pro formas, perhaps it is time such statements are given more credibility and included within the scope of the auditors’ report. FRS16 not too taxing Although FRS16 ‘Current tax’ was only published in December last year, it has a very short familiarity period as it is effective for accounting periods ending on or after 23 March 2000. This month, we see its early adoption by two investment trusts. Both Brunner Investment Trust and Charter European Trust adopt early FRS16 which has similar impacts on results and no affect on shareholders’ funds. Previously, in both cases, income received net of tax was grossed up to include the appropriate rate of tax. This year, this income is recognised net of tax credit. The effect is minimal, decreasing revenue and taxation by similar amounts and having no effect on profit after tax. Calamity JANE The accounting policies note of Brandon Hire states that it has a contractual arrangement with another company to engage in joint activity that does not create an entity carrying on a trade or business of its own. On the face of its profit and loss account, Brandon discloses a loss on the ‘joint arrangement’ of #94,000 as one of the items included within the operating profit calculation. By disclosing the result arising from the joint arrangement that is not an entity, Brandon appears to be at odds with the definition of a JANE stated in FRS9, which states the JANE’s activities do not amount to carrying on a trade or business of its own. It indicates that a JANE exists where the participants derive their benefit from products or services taken in kind rather than by receiving a share in the results of trading. The company tells us the venture is an arrangement with Magnet whereby Brandon operates four shops within Magnet’s stores under the Brandon name. Magnet owns all the assets, including those rented out, and Brandon operates the arrangement with the share of results governed by the contractual arrangement in place. Brandon tells us the arrangement is in its infancy, and if successful, will be incorporated as a joint venture at a later date. Historical cost resurrected FRS15 ‘tangible fixed assets’ features again this month with revaluation regimes being dropped in favour of companies restating their assets to historical cost. House builder George Wimpey restates its operating properties to historical cost whilst it continues to carry its investment properties at valuation. The carry forward of investment properties at valuation is possible as such assets continue to fall under the umbrella of SSAP19 ‘Accounting for investment properties’. With the 23 March 2000 implementation date of FRS15, we await with interest to see which of FRS15’s transitional arrangements will be favoured most – the restatement to historical cost or the carry forward of outdated valuations. – Company Reporting is a monthly journal that monitors UK company reporting practices. email@example.com SEGMENTAL REPORTING DOUBTS What constitutes a segmental operation is defined in SSAP25 ‘segmental reporting’. It is a fairly vague definition stating finally that the determination of a class of business is dependent on the judgement of directors. This month, two major companies amend their reporting of segmental information. ICI reduces its lines of business from six last year to five this year. The reduction involves the reclassification of its ‘materials’ and ‘coatings’ businesses into ‘paints’. Adopting an entirely new approach to defining its segments, Reuters states the segmental analysis has been restated to reflect the divisional management of Reuters’ operations. Previously, Reuters presented its segmental information on a product basis. Analysis of Reuters’ new segmental operations illustrates the only area of its business which is making losses is Reuters Ventures which is an umbrella segment that includes its traditional news gathering and new media publishing business.
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