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it wasnt showing earlier
thats why i asked but it is now ;-)
perhaps it only kicks in after a comment has been added....
To amortise or not
It's alarming that some newly qualified accountants are saying it is wrong to amortise goodwill at all. It begs the question why? I know you do not have to amortise but then you impair review but surely amortising is easier.
Goodwill on incorporation
Thank you for the article, however the majority of accountants using this website will only encounter goodwill on incorporation, which is not mentioned in the article.
Any comments and guidance on how to value goodwill on incorporation.
Thanks
Tim Charles
Print issues
Slightly off topic - Whenever I use the print facility at the top of the article I only seem to print the first page out - anyone else suffer with this strange affliction?
Valuing Goodwill on Incorporation
Now there's a dark and arcane art for you! To get this right you have to be a fully paid up weirdo. However, a simple rule of thumb seems to work OK with HMRC ... if the business is totally tied up with the owners, such as with some restaurants, some health professionals, all sports people, etc, then there is no transferable goodwill, so goodwill is zero on incorporation.
But, if the business could be sold, then take a simple percentage of last year's net profits ... if business is run from home then about 50% to 25% or even less, whereas if the business is run from high-street premises, then maybe 100% to 300%, depending on you and your client's estimate of the value of his own personality and skills ... the more the business is dependent on the client's own personality and skills, the less the value of the goodwill.
And I fully accept that this way of valuing goodwill is nothing more than hocus pokus, but I've successfully argued this method with HMRC "special branch" in the past, sometimes me agreeing a reduction in goodwill, sometimes HMRC agreeing my guesstimate as being roughly fair.
Further info on incorporation
I would also welcome further thought on goodwill on incorporation. The article is pretty definitive in not introducing personal goodwill into a personal business and I understand HMRC opinion on not allowing amortisation of personal goodwill post incorporation but how about the impact of enabling CGT taxation as opposed to Income taxation via crediting a sizeable amount to the DLA ASSUMING that the goodwill calculation is based on realistic figures rather than tax motivated numbers? What experience of this have others had?
HMRc
To be honest when we have incorporated clients recently am investigation has been opened each time and there has been a restriction of all or part of the goodwill. I know of at least 6 other accountants that have been unsuccessful in their goodwill claims. In my case it was literally because HMRC said that goodwill cannot be transferred or sold if the business changes ownership. When we challenged it HMRC commissioners said that goodwill which we had valued properly by using calculations like p/e ratios etc could not be separated from the business and therefore couldn't be recognised. It seems like the tax treatment of goodwill may follow the accounting treatment. We tend to use multipliers and cash flow approach to value goodwill but I think HMRC tend to restrict any personal goodwill being transferred on incorporation at the very least. Well that's my experience of it when we have incorporated clients.
Update on my post of yesterday
I should add, in the light of Ayesha's comment, that I haven't incorporated any client with goodwill issues in the last three years, so my experience on this is all prior to 2009 ... but I had several clients with complementary medical practices who were incorporating business which they had been running as sole traders prior to 2002, and, in only one case, where the goodwill was mooted at £30k, was any one of these queried by HMRC's complex-tax-return branch in Solihull ... and in the end a goodwill of £18k was agreed for that individual, which was c.50% of one year's net profits. All of these practitioners were working from high-street clinics, and could have sold their patient lists to other practitioners, so there were genuine sale opportunities open to these clients.
Goodwill and IFRS3 .. don't forget intangibles !
Steve's comment regarding goodwill under IFRS3 omits reference to intangibles. Unlike UK GAAP, IFRS will usually require the separate identification and recognition of the various intangible assets (customer lists, contracts, etc) that are being acquired ... which must then be amortised, usually very quickly. The result is that under IFRS you may well end up recognising a smaller amount of goodwill which is not being amortised (smaller because you have recognised a higher value of assets), but at the expense of higher amortisation of of intangible assets. I have seen situations where annual amortisation of newly recognised intangibles under IFRS is greater than the equivalent amortisation of goodwill under UK GAAP.
I understand according to IFRS internally generated goodwill is not allowed but if a new shareholder buys stake in a company(that has no goodwill on it's books) , say 10% for 50k. Can goodwill be generated OF (50000*100/10=500000) and would it be acceptable to HMRC?
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