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Goodwill issue

I have been out of practice for 5 years and newly returned, and yes I do need a little training, but I don't think any training would help with my specific question, so I am looking for some help here!

I have a client who has started a new Ltd Company, he never traded as a sole trader then incorporated for this company.

He has another Accountant for his other older company who advised that he could show Goodwill in the new company accounts for his knowledge that he has brought to the company. I think the Accountants said they would just make up a figure and see if there is any come back when they put it in.

I do not like the sound of this, as I do not know technically if correct to show knowledge as Goodwill for starters? Then there is valuing the knowledge? The standards  don't seem to cover this issue and I don't remember this situ ever coming up when I was studying my exams...a long time ago...but I may be wrong.

Can anyone give me some kind advice (not to go on a training course please...:)

Many Thanks

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20th Mar 2012 12:52

Goodwill on Incoropration

old rules:

Under the old rules there were few types of goodwill/amortisation that you could claim tax relief for.

 

Specifically it was possible to claim amortisation relief for PURCHASED goodwill which resulted from the acquisition of a business entity or Goodwill on incorporation.

 

Hence the dash for incorporation a few years ago at the time of MR browns small company NIL rate band. then 10 % band.

 

New Rules

Now though there isnt such a great distinction as far as I understand for companies. All companies can claim amortisiation relief/impairment lossses

on intangible assets whether goodwill/patents /trademarks etc.

 

look it up.

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By blok
20th Mar 2012 14:37

.

whooaa there.

sounds like company has created its own goodwill.  There is nothing being transferred.  Last time I looked it was very very difficult to justify any entry on the balance sheet for internally generated goodwill.

tax relief - no chance.

 

Thanks (1)
20th Mar 2012 19:07

Internally generated goodwill

Hi,

The standard that covers goodwill and intangible assets is that of FRS 10 (if your client is reporting under the FRSSE then go to section 6, page 40).  Both are very specific on the issue of internally generated goodwill - you cannot capitalise it.

Regards

Steve

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By LeighM
20th Mar 2012 21:13

Is it really internally generated though??? The owners knowledge was gained pre incorporation so he sees it that he is bringing his knowledge to this new company he has set up.

I will have another look at the standards and the new rules with fresh eyes. I think its quite a tricky one.

Also, does anyone know if I could contact any official body, ICAEW or HMRC for example for clarification on the treatment, if it still does not become clear with further reading? 

Thanks for all the replies...its great to know I can fire out thoughts as a sole practitioner and there is people willing to answer! Much appreciated. 

Regards

Leigh

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20th Mar 2012 21:54

Know-how

The problem you have here is that such 'know how' is going to be very difficult to measure in terms of valuation and identification. If you go back to the Statement of Principles in terms of recongising assets, you can only recognise an asset in the balance sheet when:

1.  There is sufficient evidence of the item's existence; and

2.  The item can be measured at a monetary amount with sufficient reliability (ie not just 'making a figure up' as per the old accountant)

Notwithstanding the fact that the owner's technical knowledge is probably pivotal to the success (and continuity) of the business, how can you measure the cost of this knowledge with 'sufficient reliability'? I doubt very much that there is an active market for such knowledge and therefore you would not be able to recognise an intangible asset because you cannot value it with sufficient reliability.  The standard recognises that, in reality, very few intangible assets will have a readily ascertainable market value.

If you are a member of a professional body you should be able to get assistance from your body's technical helpline.  If you're not, then have a look at FRS 10 (para 14 for internally developed intangible assets) and paragraph D of the Summary in FRS 10 on page 4.  The FRSSE covers goodwill and intangible assets at section 6 on page 40.

Regards

Steve

 

 

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By LeighM
21st Mar 2012 07:35

That's absolutely brilliant Steve. Sums it up nicely.

Thank you!

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