Sage warned over goodwill
Accounting software giant Sage was this week warned its profit figures would be hit 'by a significant amount' if it moved away from its 'contentious' accounting mechanism towards a standard type.
The company would face millions of pounds of write-offs if it moved to standard industry practice in the way it treats the acquisitions it has made in recent years.
The software giant, whose agm takes place next month, could now face pressure to fall into line.
After a number of deals in recent years, Sage has £836m of goodwill sitting on its balance sheet. If it was to amortise it over 20 years, it would have to wipe off more than £40m a year off its paper value, though it would not affect cashflow. According to its latest annual report of The Sage Group, profits were up £10m from £74m to £84m.The company is understood to be the only IT company in Europe not to amortise goodwill, instead, it completes an annual impairment review, examining the performance of each business to see if the value has fallen.
Its policy is fully disclosed and highly visible, and enables readers to evaluate it and apply amortisation charge if they want.
A technical accounting expert at Company Reporting magazine said: ‘Sage’s profit figure would be hit by a significant amount if it were to amortise over 20 years.’
Merrill Lynch analyst Ariel Bauer added: ‘If Sage had to write down its goodwill after an impairment test, it would wipe out accounting profits as the goodwill on the balance sheet is much larger than the annual profit.’
Another analyst said: ‘Sage’s accounting policy on acquisitions is contentious but by no means misleading.’ Sage itself said: ‘Our accounting principles comply with UK and US GAAP. Sage has a track record of significantly enhancing the value of goodwill. Our approach involves subjecting goodwill to rigorous annual impairment review rather than arbitrary goodwill amortisation.’