Companies gain from new ASB goodwill policy

Balance-sheet values of companies as varied as Cadbury Schweppes confectionery and drinks group and the PR consultancy Shandwick Group could climb and earnings ratios fall if plans to change the accounting treatment of goodwill and other intangible assets published today are adopted.

The Accounting Standards Board hopes the proposals will defuse one of the longest-running rows in acquisition accounting. Its exposure draft Fred 12 recommends goodwill and intangible assets, such as licences, franchises, publishing titles and brands, are capitalised as assets on the balance sheet.

Then the general rule would be that goodwill should be written off gradually - amortised against earnings - but it would also be possible to retain goodwill provided regular reviews showed no impairment in value.

This would mean that ordinary shareholders' funds would be strengthened - since they would include amounts previously written off to reserves - but the return on equity would look less impressive. It is understood that other international standard-setters are looking at this approach.

The proposals - developed after extensive consultation over the past three years - represent a significant change from present practice. SSAP22, introduced by the ASB's predecessor, the Accounting Standards Committee, allows a choice of accounting treatments. Its preferred approach - used in the vast majority of acqusitions - is immediate elimination against reserves, though it also permits capitalisation as an asset, with subsequent write-off by systematic amortisation through the profit and loss account.

The ASB points out that the preferred approach has been rejected internationally and been criticised for giving the impression that the acquiring company's net worth has been depleted or even eliminated, and for causing financial statements to overstate the rates of return achieved on acquired investments.

This has subsequently led to companies reducing the amounts attributed to purchased goodwill by separately valuing brands and similar intangible assets as identifiable assets on the balance sheet. But the ASB believes that this is anomalous.

Sir David Tweedie, ASB chairman, said the proposals - which must be commented upon by 25 October - provided "a solid and constructive solution to a very longstanding problem". He was supported by other leading accountants, such as Peter Holgate, technical partner at Coopers & Lybrand, who said they "seem to have the best chance of attracting support".