The main FRS 10: ‘Goodwill and Intangible Assets’ requirement that pound, plus more on goodwill. goodwill be capitalised and amortised does not have to be applied retrospectively, although the Accounting Standards Board would prefer companies to do so.
One company that does adopt the ASB’s favoured approach is cooker specialist Stoves.
Stoves capitalises retrospectively goodwill that was written off to reserves following a 1991 acquisition, but no goodwill asset arises as a result.
This is because the goodwill is so old that the company considers its useful economic life to be over. Thus, had it been capitalised originally, the asset would by now have been fully amortised.
As shown in the reserves note to the accounts, the net effect has been simply to move the old goodwill from goodwill reserve to profit & loss reserve – exactly the same reserve movement that would have taken place had Stoves followed FRS 10’s alternative transitional option of leaving old goodwill in reserves.
As the pound remains buoyant, we continue to see companies switching from closing rates to average rates when translating the results of their foreign undertakings. But at least one company, engineer Syltone, forsakes short-term gains in order to maintain accounting consistency.
Syltone discusses the adverse effect on turnover of the strength of sterling, but views a move to average rates as inconsistent and playing with numbers.
Not only is this approach refreshingly frank, it is in keeping with the Companies Act 1985 requirement that accounting policies be applied consistently from one financial year to the next, and the SSAP 20: ‘Foreign currency translation’ requirement that the translation method used be applied consistently unless there has been some change in the company’s financial and operational relationships with its foreign undertakings.
This stance will look even more mature when the pound eventually falls and many of the companies that have switched to average rates go rushing back to closing rates.
De-listing and re-listing
Falling foul of the Stock Exchange’s rules can be an expensive business, and construction company Boustead uses the pages of its annual report to convey its dissatisfaction with the whole process.
Boustead discloses that, in between disposing of its UK operating companies and acquiring a company based in Hong Kong (Sunlink), it suffered a barren non-trading period during which its balance sheet consisted mainly of assets of a cash nature. The Stock Exchange requires that a company in this position de-list, on the grounds that a false market in its shares may arise.
Boustead does not agree with this rule, stating that ‘an impartial observer might find this a trifle illogical, as nothing could be more transparent and verifiable than a balance sheet which is mainly cash’. The result of this enforced de-listing, followed by the subsequent re-listing after the acquisition of Sunlink, is a charge to profit of nearly #0.25m.
New style p&l catches on
Last month we highlighted the innovative p&l account of Whitecroft (10 September, page 18) and wondered if it would prove to be a popular development.
It is, of course, too early to tell, but this month IT company Rolfe & Nolan adopts a similar format for similar reasons.
The steady performance of Rolfe & Nolan’s futures and options division is in marked contrast to the disappointing results of its capital markets division, which has been earmarked for disposal.
The company includes an element of segmental analysis on the face of its p&l account, which discloses by division turnover and operating profit before exceptionals. This p&l account format enables analysts to see at a glance the contrasting fortunes of the two divisions.
Whatever the FRRP wants
In the wake of the Financial Reporting Review Panel’s mauling of Harveys Furnishing we would expect companies to tread warily in similar circumstances.
So it is perhaps not surprising that retailer Brown & Jackson accounts for an acquisition along the lines of the FRRP’s recent findings.
During the year, Brown & Jackson made an acquisition, with part of the consideration being met by a set number of shares. In the time between the agreement being negotiated and approval being given by shareholders, Brown & Jackson’s share price had increased by 30%, from 16.5p to 21.5p.
Faced with a similar situation last year, Harveys Furnishing calculated the fair value of the consideration using the share price at the time of negotiation, saying the price at the time of acquisition was unreliable.
Following the findings of the FRRP, though, it restated the fair value of the consideration in line with the share price applicable at the date of acquisition. Wisely, Brown & Jackson goes straight for the latter approach, leading to an increase of #1.7m to both consideration and goodwill.
A major driving force behind the publication of FRS 12: ‘Provisions, Contingent Liabilities and Contingent Assets’ appears to be the ASB’s dislike of reorganisation provisions.
Already, their inclusion within acquisition fair value exercises has been restricted severely by FRS 7: ‘Fair Values in Acquisition Accounting’, but that does not mean they are dead and buried – especially when companies feel strongly enough to make use of the true and fair override.
Engineering company AIM made an acquisition during the year and includes in the fair value of assets acquired a provision of #1m for the cost of closing an operating facility.
FRS 7 precludes such provisions from the fair value exercise unless the acquired company was committed to, and unable to withdraw from, the reorganisation. AIM accepts that the closure decision was its own, but says it was an integral part of the decision to make the acquisition, and that the provision should be included in order to calculate a more appropriate figure for goodwill.
This is an entirely reasonable argument, and one which was voiced by many in response to the relevant exposure draft at the time but which the ASB rejected unequivocally.
Retrospective merger relief
Applying merger relief is a common enough practice, whereby all or part of the share premium arising on an acquisition is transferred to a merger reserve for the purpose of eliminating goodwill. What is less common, but appears to be becoming more popular, is companies applying merger relief retrospectively to acquisitions that took place in the past.
For example, this month Westminster Health Care transfers #0.7m from share premium account to merger reserve, which is then used to eliminate goodwill that was written off to the p&l reserve originally in 1995. These past few months have seen a number of quirky reserve movements like this, many being preparatory actions in anticipation of the effect that FRS 10 will have on old goodwill languishing in reserves.
ASB in overdrive
August saw the publication of FRS 11: ‘Impairment of Fixed Assets and Goodwill’, and this month we see the arrival of two more: FRS 12: ‘Provisions, Contingent Liabilities and Contingent Assets’, and the mammoth FRS 13: ‘Derivatives and other Financial Instruments: Disclosures’.
While FRS 13 was published too late for these companies, both follow the proposals of FRED 13 – which bears the same title and provided the basis for the new standard.
Issue of the month
Examining the disclosure of contingencies in the light of the requirements of FRS 12, demonstrates that FRS 12 is a great improvement on FRED 14: ‘Provisions and Contingencies’. This is because the contingency sections dovetail neatly with those on provisions, rather than appearing to be stuck on as an afterthought.
The lack of disclosure given currently regarding the uncertainties surrounding contingencies is problematic. Perhaps companies should look for help from auditors in ensuring that FRS 12 will have more success than SSAP 18: ‘Accounting for Contingencies’ in generating disclosures that analysts can really get their teeth into.
This feature is an edited version of the review published in Company Reporting. For details, telephone Company Reporting on 0131 558 1400.
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