Accounting rules war begins: Heather Connon describes an attack by finance directors on an 'illogical' new standard relating to acquisitions

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The Independent Online
CHANGES to the rules on how companies should account for acquisitions are illogical and 'do no service to users of accounts', the Hundred Group of finance directors claimed yesterday.

The remarks, from representatives of Britain's leading companies, mark the formal outbreak of hostilities in a battle that has simmered since the Accounting Standards Board signalled its intention to clean up acquisition accounting 18 months ago. It is a clear sign that companies do not intend to give up despite the ASB's refusal to dilute its proposals.

Financial Reporting Standard 7, Fair Values in Acquisition Accounting, published today, aims to end one of the most fertile areas for creative accountants - establishing provisions for future redundancies, factory closures and other rationalisation.

The flexibility of the current system means that even the most disastrous acquisition can be made to look excellent, at least until the provisions run out. The costs of merging factories, closing head offices, sacking unwanted employees, even the losses that the acquired businesses are expected to make until rationalisation is completed, can all be salted away as part of the cost of the deal.

But if the company acquired had conducted a similar reorganisation while independent the costs would have had to be charged against profits, severely affecting performance. There is also a suspicion that acquisitive companies are over-generous in their provisions, using them to flatter future profits and offset reorganisation costs.

Under FRS7, which takes effect for accounting periods beginning after 23 December, such pre-acquisition provisions will be banned. Instead, the costs will have to be written off against profits as they are incurred.

Nigel Stapleton, chairman of the Hundred Group, believes that destroys one of the basic accounting principles.

'It is a well-recognised accounting principle that when you spend money on improving a capital asset this money is treated as part of the cost of the asset and not a revenue expense,' he said.

'If you buy a house for, say, pounds 100,000 that you know needs pounds 50,000 spent on it to bring it into good condition and make it equivalent to a property that sells for pounds 150,000, you would treat the pounds 50,000 renovation as part of the cost of the house and not as part of the outgoings.'

The attack was dismissed as misrepresentation of the ASB's position by Sir David Tweedie, its chairman. 'What we are saying is that you can't say the house was worth pounds 150,000 at the beginning, nor can you treat expenses like sacking the gardener as part of its cost,' he said.

'We are not changing the rules. We are sticking to the letter and making them exactly the same for everyone.'

Industry's opposition to the changes is hardly surprising given the generous use that has been made of the current system. Tomkins provided pounds 121m before tax for redundancies, rationalisation and asset write-offs when it bought Ranks Hovis McDougall for pounds 990.5m.

BTR allocated pounds 113m in the year it acquired Hawker Siddeley but even that was not enough. The following year it added a further pounds 54m. Had it been prevented from making such provisions, BTR's results would have looked rather less attractive.

In 1993 it used pounds 197m of acquisition provisions. Had those restructuring costs been charged against profits it would have disclosed static pre-tax profits rather than a 19 per cent increase.

Owners of companies, as represented by institutional investors, are firmly behind the new standard. 'For too long this has been an unsatisfactory aspect of financial reporting which makes it difficult for investors to assess and compare the financial position of acquisitive companies,' Standard Life said.

Pressure for changes to the standard is unlikely to end, but the threat of being taken to court for failure to comply means most companies are expected to toe the line.

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