My client's previous accountant has capitalised the settlement costs relating to a legal dispute between his company and his old employer. The dispute arose due to a violation of the director's non-compete clause in his employment contract with his old employer. After leaving his employer, the director set up his own company and began doing business with customers of his old employer. To resolve the matter, the new company agreed to pay the previous employer a set amount to settle the matter.
The terms of the agreement:
- Lift an injuction that the previous company had placed on the company;
- Constitutes full and final settlement of the matter and all related matters;
- Applies a restrictive covenant on the company approaching any further customers of the old employer, excepting a detailed list of the customers that they already have done business with
I would appreciate it if anyone would comment on: -
- whether they feel that this has given rise to an intangible asset (identifiable asset (lift of injuction and access to prescribed set of clients); arrising from legal rights (settlement agreement)).
- this is a true cost of the company, given the original employment contract was that of the director
PS - Previous accountant's reasoning -"The settlement costs have been capitalised as an intangible asset/goodwill and are being amortised over 10 years. The rationale for doing so, rather than expensing the cost in full, is that the £185k settlement payment enables the company to continue trading for the foreseeable future and 10 years is the maximum period allowed in the absence of more reliable method to determine the useful life. A nominal figure of £10k for the goodwill based on clients being able to cancel within 4 weeks has been used on the basis that this would represent the fair market value because the clients have loyalty to you."