View from City Road: When goodwill is not what it seems

Those looking for guidance about how to account for goodwill should ignore yesterday's discussion document from the Accounting Standards Board, and concentrate on the directive about how to treat goodwill when businesses are sold.

That stipulated that any goodwill written off when a business was acquired should be taken into account when calculating the profit on its disposal. Since this provision took effect two years ago, virtually every company - with Hanson a notable exception - has turned disposal profits into embarrassing losses. That not only confirms that far too many companies make disastrous acquisitions, it shows just how quickly so-called goodwill can evaporate.

Acquisition accounting means goodwill is not what it seems: it is the balancing figure between the cost of the acquisition and the assets acquired - reduced by provisions to smooth the deal on its way. Thus the goodwill created by the 1980s spending sprees of WPP and Saatchi & Saatchi had less to do with the advertising accounts and executives acquired (whose value proved as short-lived as the economic boom) than with the amounts the City was persuaded to put up for the deals.

If the 'value' of goodwill can shift so dramatically, the last place it should be is on the balance sheet - and the ASB's proposal that it should be depreciated over an arbitrary 20-year period suggests it, too, realises that goodwill is not a normal asset. Writing it off immediately is a far better recognition of economic reality.