The new chief executive of Majestic Wine this week blamed accounting principles and the Accounting Standards Board for turning a £100,000 half-year operating profit into a £4.4m loss.
Reactions in the City were generally sympathetic, citing the “hangover” from last year’s poor results and reporting the claims of new chief executive Rowan Gormley that the company had reached the tipping point and was heading in the right direction.
Gormley was brought in to replace former Majestic chief executive Steve Lewis last year and the company bought his business Naked Wines at the same time. Write downs of £4.5m mainly relating to that acquisition were the main reason for the reported loss.
Dominic O’Connell, business presenter on Radio 4’s Today programme, goaded Gormley into a critique of accounting standards on Thursday morning [1hr 20mins into the broadcast] by suggesting that Gormley himself was “partly responsible for this write-down”.
“The difference between the trading profit and the write-down of the acquisition is an accounting matter, it’s not a cash matter. The number we focus on is trading profit,” the Majestic chief executive argued.
According to Gormley all of Majestic’s key performance indicators are heading in the right direction. If that growth is sustainable and the fixed costs remain steady, that sales growth will translate into profit over time, he argued.
“You should speak to the Accounting Standards Board about the policy on write-downs of acqusitions. You are required by the accounting board to amortise the cost of the goodwill in acquisitions over a period of years. This is not a reflection the company’s performance has been poor. This is not a write off of goodwill. This is simply an amortisation of goodwill which you are required to do.”
AccountingWEB’s financial reporting expert Steve Collings commented: “I’m not sure Gormley fully understands the difference between amortisation of goodwill and the writing down of an acquisition.
“The group has prepared its interim financial statements under IFRS, which prohibits goodwill from being amortised and instead requires entities reporting under IFRS to test goodwill annually for impairment.”
Under this regime if the carrying amount of the goodwill in the accounts is higher than the recoverable amount, goodwill is impaired and must be written down. So the charge in respect of goodwill would represent the declining value of the acquisition(s) rather than amortisation, which is not the same as impairment, he expained.
“Had the company prepared its accounts under, say, FRS 102 then it would be required to amortise its goodwill over its useful economic life; this is where FRS 102 differs from IFRS,” Collings said.
From a technical perspective, he added, the value of the acquisitions were clearly declining, which is represented by the £4.5m write-down to the recoverable amount.
“Blaming the International Accounting Standards Board and accounting standards is not a feasible argument because what would be the alternative?” he said.
“Ignoring the fact that acquisitions are declining in value and reporting a disproportionately higher value of assets? The group has exercised prudence and recognised its acquisitions are not performing as well as expected and hence the profit and loss has taken the hit, which is what the accounting standards would require.”
“IFRS principles work in the same way as other GAAPs in that you cannot carry assets in the balance sheet at any more than their recoverable amount; to do so would render the accounts misleading. Where assets are stated in excess of recoverable amount, then they must be written down by way of an impairment loss.”
About John Stokdyk
John Stokdyk is the global editor of AccountingWEB UK and AccountingWEB.com.