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Goodwill impairment review

Goodwill impairment review

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My client incorporated in 2006 and sold existing goodwill to the company. As the business commenced after 2003 my client took advantage of Schedule 29 FA2002 and so the goodwill that is amortised over 10 years is tax deductible. My client is a mortgage broker and has been really struggling over the last couple of years and has in fact taken another job as this business is providing insufficient income. There appears to be an argument here about the existing goodwill being impaired and written down more quickly but FRS11 discusses in somewhat vague terms about the net present value of future cash flows. Can anyone advise whether the impairment argument can be justified given the facts presented and if so how the impairment calculation can be made ? Many thanks.

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By Ian Kent
09th Oct 2010 11:40

Why not?

I have had to consider a similar situation recently.  I think judgement is called for as there are no clear rules.

I submitted goodwill value on form CG34 to HMRC on incorporation of client's business.  This set out the method of calculating goodwill and was accepted by HMRC......eventually and after sending in documentation 3 times!   Sales or profit is likely to be one of the key factors in calculating goodwill so if profits have fallen why not substitute the reduced sales or profit in the formula used in CG34 to arrive at current value of goodwill - deduct new goodwill from original amount to arrive at amortisation. I weight profits in CG34 calculation so recent results are givern more importance.

Alternatively if business is dwindling rapidly, say 35% reduction in sales in a year, then you may be able to argue that there is unlikely to be any worthwhile business, or goodwill, left in X years and write down accordingly.

My accounting software (VT) gives a default write down period of 5 years for Intangibles in Notes to the Accounts.  I believe HMRC allow 4% amortisation on straight line basis (25 years) as a fall back as an alternative to your own calculation.  Not sure if either of these clarifies anything, however, although I would argue that prudence in valuing goodwill is called for.

I have not actually had to submit anything yet and others' comments would be welcome.

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