Goodwill and intangible assets - FRS 10

FRS 10 - in force for year ends after 22 December 1998

Compared with past practice, FRS 10 will turn upside down the balance sheets of many acquisitive companies, and reduce reported profits. As with FRS 9 the impact will be felt mostly in consolidated accounts but even a small company acquiring an unincorporated business has to account for goodwill.

The principal conclusions of FRS 10 were as inevitable - the UK was previously out of line with the rest of the world in having a standard, SSAP 22, permitting goodwill to be written off directly to reserves - as they were slow in coming - the old Accounting Standards Committee started this review in the last decade - and controversial - one die-hard member of the ASB has insisted on his dissenting view being published.

In essence, FRS 10 requires goodwill to be capitalised and amortised. In addition, the ASB has legislated against the capitalisation of internally generated goodwill and most such intangible assets, and generally codified the valuation, amortisation and disclosure rules for positive and negative goodwill and intangible assets. The principal points are as follows.

Acquired goodwill and intangible assets will generally be capitalised and amortised over their useful lives (up to 20 years).
Exceptionally, useful lives can be estimated to be longer than 20 years or even to be indefinite.

Whenever adverse economic circumstances may have affected goodwill or an intangible asset, and annually for longer or indefinite life items, the carrying value must be tested for "impairment". Any impairment losses must then be charged through the profit and loss account.
The presumption of an indefinite life for goodwill obviously preserves the earnings of the acquirer (provided there is no impairment) but breaches a fundamental requirement of the Companies Act, and must therefore be fully disclosed as an override necessary to the true and fair view.
Generous (lax?) transition rules permit that goodwill written off to reserves in accounting periods prior the implementation of FRS 10 need not be capitalised.

This website is intended for general guidance only. No responsibility for loss occasioned to any person acting as a result of any material in this publication can be accepted.

top	previous next