Controversial accounting methods that flatter profits in the event of mergers are to be banned under a set of proposals made by the International Accounting Standards Board yesterday.
The proposals will put an end to the so-called "pooling of interests" method of accounting that adds together the book values of the two companies at the date they combine. This avoids any recognition of goodwill, which would otherwise lead to a depreciation charge and depress profits.
Mergers which have used this accounting method include Halifax-Bank of Scotland, Glaxo-SmithKline Beecham and BP-Amoco. It has also been used in the restructuring of companies such as BHP Billiton, BT, Birmingham City and Granada.
Sir David Tweedie, the IASB's chairman, criticised the accounting method, which has already been prohibited in the United Sates. He said: "Some of these mergers were not mergers at all; they were takeovers."
He said the accounting method flattered profits that would have otherwise been hit by a goodwill charge. "It's instant profits and future profits," he said.
The IASB made further proposals yesterday including the amortisation of goodwill over the entire useful life of an asset, rather than over 20 years, as is currently required.
The proposals are the latest in a raft of recommendations made by the IASB as it seeks to introduce common accounting standards worldwide. It is part of a campaign to clean up company accounts in the wake of corporate scandals such as Enron and WorldCom.
If implemented in full the changes will end accounting practices that the IASB says inflate profits, lower costs and present a misleading impression to investors.
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