Goodwill proposals could sting companies

Monday 17 January 1994 00:02 GMT
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PROPOSALS to change the method of accounting for goodwill may prove to be complex, costly and subjective to apply, and likely to give rise to hits against profits at exactly the time when a company is least able to bear the loss, says Touche Ross, the accountants.

In the first big study of the Accounting Standards Board's proposals on goodwill, which will be circulated in the City today, Touche says that any changes will have a dramatic effect on profits and balance sheets.

Those most affected include Grand Metropolitan, Cadbury Schweppes and Reckitt & Colman, which have included the value of brands in their balance sheets.

Under the ASB proposals, the value of intangible assets such as brands would have to be included as part of goodwill - the difference between the cost of an acquisition and the value of the assets acquired. Under one option, however, goodwill could be retained on the balance sheet as an asset.

Ken Wild, who wrote the submission, attacks the decision to ban brand valuations as a blunt instrument which would lump all intangible assets together. He says brand names should be separated from other intangible assets.

He welcomes the proposal of a 'ceiling test' to allow companies to write down goodwill arising when a business is acquired over a period on the profits it earns. But he proposes that it be amended to allow companies to base the goodwill write-off on the value of their brands. Under his ceiling test, if the brands were still earning profits, the goodwill figure would be maintained. But as profits from the brand fell, the goodwill would gradually be eliminated.

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