Balance sheet change proposed
Wednesday 14 October 1992
The report, which is published by the Institute of Chartered Accountants in England & Wales, suggests a departure from the current practice, under which goodwill - usually the difference between the acquisition price and the value of the assets acquired - is written off against reserves immediately.
It is proposing a move to the US system, where companies include goodwill as an asset on their balance sheets, provided that its existence and value can be justified. But it adds that the value should be written off against profits over its estimated useful life. In no circumstances should goodwill be charged against reserves.
The recommendations come as the ASB is considering its own proposals for goodwill and other balance-sheet asset valuations, which are expected to be issued later this year.
The report suggests that goodwill can be split into three categories: the fair value of separately identifiable intangible assets such as brands or trade marks; the present value of benefits arising from certain situations, such as a monopoly or a barrier to entry; and over or underpayment.
The value of the first two categories should be included in the balance sheet as assets, as long as the company's directors and auditors are satisfied that the amount at which they are capitalised is no greater than the recoverable amount.
But overpayments should be written off against profit, while underpayments should be credited to reserves.
For reasons of consistency, it is proposed that internally created intangible assets should be dealt with in the same way as purchased ones - included as assets and depreciated in accordance with the guidelines.
However, because of the difficulties of determining their costs, the report recommends that such intangibles should be included at the discretion of managers, subject to the approval of the company's auditors.
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