Goodwill fudged

Cadbury Schweppes, engineering group Chemring and outsourcing company Capita Group are among the first companies to use the true and fair override to circumvent a legal anomaly between FRS 10 and company law.

In its annual report, Cadbury’s disclosed that goodwill arising from its 1998 acquisition of The American Bottling Company and Amalgamated Beverage Industries was not amortised because each investment was considered to have ‘indefinite durability’. If the goodwill had been amortised over 20 years, it would have cut operating profit by #5m.

FRS 10 permits goodwill not to be amortised as long as companies conduct an annual impairment review, but the 1985 Companies Act requires assets – including goodwill – to be depreciated over a period determined by directors.

The goodwill standard advises companies to invoke the true and fair override where such conflicts arise.

Accounts monitor Company Reporting predicted more businesses would follow the companies’ lead, and a survey by Arthur Andersen showed 5% of companies were doing so.

‘Where there is an underlying intangible created through market position, such as a brand, indefinite life is entirely appropriate,’ said Andersens professional standards partner Isobel Sharp.

Technical director of the Accounting Standards Board, Allan Cook, said the ASB was aware of the conflict when FRS 10 was drafted. ‘We wanted to develop a standard that would acknowledge the value of what had been acquired, but knew if we went down this road, we would hit a stumbling block,’ said Cook. ‘Our legal advice was that if there was a conflict, companies should invoke the override, but confine it to rare and specific circumstances.’

The underlying legal conflict is also enshrined in the fourth European directive governing accountancy. It and the Companies Act are under review.