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Transition to FRS102 - goodwill

Transition to FRS102 - goodwill

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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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By Portia Nina Levin
28th Oct 2014 16:03

This is not the proper place

To ask technical accounting questions. Imagine the sea of blank faces staring back at you. :)

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By TerryD
28th Oct 2014 16:05

Just like when I look in the mirror you mean?

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By taxguru
28th Oct 2014 17:23

Have you read para 35.8, 35.9 ....of FRS 102??

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By TerryD
28th Oct 2014 17:40

Yes

35.8 effectively says that accounting policy adjustments on transition are reflected at the date of transition (1 January 2013) and 35.9 says that changes in accounting estimates cannot be reflected retrospectively (so must be accounted for in the current year). At least, that's how I read them!

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By leicsred
29th Oct 2014 06:55

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

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By TerryD
29th Oct 2014 09:39

Thanks. Yes, that would increase the annual charge from £200k to £500k. Still quite a big hit, but leaving a substantial profit behind. However, the client's problem, and mine as auditor, would still be how to justify even a remaining life of 5 years. The truth is that, as often happened, the 20 year life was seen as a default position and no real attempt was made to establish the actual useful life (I have a schedule of projections and various other calculations, but the assumptions used don't really stack up any more).

So I'm seeing this method as one-off chance to get the whole lot out of the way without it ever going through a single year's P & L Account. I'm also suggesting revaluing the freehold property as at I January 2013 and using that as deemed cost. That will not only counter the effect on retained earnings of writing off the goodwill, but go some way to hiding the effect as in the reconciliation of equity I shall have a single line for fixed assets which will then actually show an uplift at 1 January 2013 because I expect the revaluation surplus to be greater than the goodwill write off. The notes will, of course, explain the make-up of the figures, but nobody will read them!

I'm just a bit nervous that I'm bending the rules to achieve the desired objective. Hence my seeking some back-up here!

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By zarathustra
29th Oct 2014 10:30

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?

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By taxguru
29th Oct 2014 12:16

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?

 

 

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By TerryD
29th Oct 2014 12:54

Yes, I'm suggesting that we could adopt the provisions of section 19 to effectively break down the goodwill into its constituent parts as separate intangible assets and then amortise them (down to zero) accordingly. This would then, I think, be a change of accounting policy.

I thought about ringing ICAEW technical support - but I'm frightened they might disagree with me! One gets a broader spread of interpretations on Aweb.

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By taxguru
29th Oct 2014 13:04

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

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By TerryD
29th Oct 2014 13:09

Yes, but I'm suggesting that we do apply section 19 to prior year acquisitions.

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By taxguru
29th Oct 2014 13:12

And then qualify your own report??

Edit: i.e. the audit report

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By TerryD
29th Oct 2014 13:50

Well, no - I'm hoping that my interpretation is sustainable. You think it isn't?

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By TerryD
31st Oct 2014 10:11

Thanks for all your thoughts. Any more views?

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