Brands valuation may be banned from balance sheet

MANY of Britain's largest companies may be forced to exclude millions of pounds worth of brands from their balance sheets under radical proposals being considered for the treatment of goodwill.

The proposals, set out in a discussion document today by the Accounting Standards Board, could have a dramatic effect on companies like Grand Metropolitan, Cadbury Schweppes and Reckitt & Colman.

The ASB paper says that intangible assets such as brands, publishing titles and newspaper mastheads are inseparable from the goodwill of a business and should be classified as such in a company's accounts.

It outlines two possible methods of accounting for goodwill, one of which could have a dramatic impact on the accounts of some of Britain's largest companies.

Under that option, goodwill - the difference between the price a predator pays to acquire another company and the value of the underlying assets acquired - would have to be written off against reserves immediately. While that would be in line with current practice, the ban on accounting for brands means the proposal is likely to provoke a storm of protest.

A large number of companies, particularly in consumer businesses, put a value on the brands they acquire as part of a takeover.

Grand Met, for example, has pounds 2.5bn on its balance sheet - almost two-thirds of its net assets - for names such as Smirnoff vodka, Pillsbury and Burger King, while more than 80 per cent of Reckitt & Colman's net assets relate to the value of brands acquired when it took over the US household products group Boyle-Midway.

Under the second option, goodwill would be treated as an asset of the business and written off over a maximum of 20 years. While brands would still have to be reclassified, they would be retained on the balance sheet, limiting the damage to net assets. Future profits would, however, be depressed by the annual writing-down charge.

The draft also considers allowing companies to write goodwill over a longer period if they can prove that the value of the business acquired will endure. Companies chosing that route would have to satisfy strict conditions.

David Tweedie, chairman of the ASB, said the board was evenly split between the two options and would consider comments from companies and users of accounts before deciding which to adopt.