A client, December year-end, has large amounts of goodwill on consolidation arising from prior acquisitions, which were for the purpose of geographical expansion. These are currently being written off over 20 years, but it is hard to see that this life can continue to be justified. The client accepts that, regardless of the new FRS102 rules, the goodwill needs to be written off now as an impairment loss arising from a change in the estimate of its useful life. However, such an impairment will turn a £1million profit in 2014 to a £1million+ loss, and the client doesn't fancy that! So I've been asked to suggest a way round it. How about this:
Adopt FRS102 early (31 December 2014), then, using s. 19, restate the existing goodwill by breaking it down into its component parts (customer base, existing order book, branch locations, etc.) and treating these as separate intangible assets, with, say, 5 year lives, all of which will have expired two or more years ago. I'm thinking that this would then constitute a change of accounting policy, rather than a change of accounting estimate, and so, on transition to FRS102, will be adjusted on the opening position (1 January 2013), and so won't go through either the 2014 P & L Account or the 2013 comparatives.
Any thoughts? Does this hold water?
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This is not the proper place
To ask technical accounting questions. Imagine the sea of blank faces staring back at you. :)
5 years from now
I have been on a couple of courses where it has been suggested that it would be an allowed interpretation to take the 5 years as being from the date of adoption of 102, not from acquisition, it may be worth looking into if that is still deemed as a viable approach.
Might mitigate the impact a bit
One presumes...
...you'll be writing an expensive special report on this for the client, so might be worth paying for a bit of advice. Alternatively there is always the ICAEW or similar technical help desk. Does anyone remember Richard Barton's peerless technical advice invariably dispensed in a pithy and erudite fashion?
As I understand a first-time adopter has the option of revaluing intangible assets (that meets the recognition and revaluation criteria per s.18) at fair value. (Para 35.10(c).
The revalued cost will then be the deemed cost on the transition date, which in this case zero.
Then applying 35.8 the treatment you have suggested is correct.
However, 35.10(a)(ii) says no adjustment shall be made to the carrying value of goodwill. So are you saying that it is not in fact goodwill strictly applying the FRS102 recognition criteria?
35.10 (a) A first-time adopter may elect not to apply Section 19 Business Combinations andGoodwill to business combinations that were effected before the date of transitionto this FRS