BusinessCorporate FinanceMerger standard ‘way over the top’

Merger standard 'way over the top'

Sharp criticism has been levelled at a proposed new standard for the accountancy treatment of mergers, putting the ICAEW on a collision course with the global standard setter.

Link: Shake-up ends EU mergers watchdog

The institute argued the ‘impairment only’ regime on goodwill – which would replace traditional amortisation in the International Accounting Standards Board’s proposed new rule – raised ‘grave concern’ and would cost small businesses far too much. ‘The proposed annual impairment test goes way over the top. For most smaller companies, the costs will outweigh any possible benefit.

We strongly recommend the board retains amortisation for cases where their complex routine is not justified,’ said Andy Simmonds, chairman of the institute’s working party.

Amortisation of goodwill has come under attack because, in the nineties, companies tended to pay too much for acquisitions. In many cases their current amortised value is still too high compared to the companies’ own value on deflated stock markets.

The ICAEW acknowledged problems associated with the amortisation of goodwill, but concluded that the impairment-only approach did not achieve an acceptable balance between ‘representational faithfulness’ and practicality. ‘This approach is appropriate only where two conditions exist: firstly, goodwill can be shown not to have a finite life; and secondly, the prescribed impairment test can be shown to be both reliable and justified in terms of cost/benefit,’ the ICAEW wrote to the IASB.

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