The season of goodwill (amortised over 20 years)

Do any of your clients have goodwill in their accounts? Do you audit accounts with goodwill in them? Do your accounts have goodwill in them? If the answer to any of these questions is yes then you may have some important justifications to make.

Goodwill in a set of accounts prepared under current (old) UK GAAP is amortised, or not, according to the period over which the entity expects to derive economic benefits from that asset. This has been the accounting rule in place for many years and it is the application of this rule that should have driven a businesses' amortisation accounting policies.

The FRSSE 2008 talks about this useful economic life not exceeding 20 years and FRS 10 has a rebuttable presumption that the period is 20 years or less. In the context of determining useful economic lives, FRS 10 notes:

'The useful economic lives of goodwill and intangible assets will usually be uncertain. This uncertainty does not in itself form grounds for treating a useful economic life as indefinite or for adopting a 20-year period by default. Where, for example, the useful economic life of goodwill or an intangible asset is expected to be less than 20 years, the FRS requires an estimate of the useful economic life to be made.' (FRS 10 para21)

FRS 10 also requires that goodwill is reviewed for impairment at the end of the first full financial year following the acquisition and in other periods if events or changes in circumstances indicate that the carrying values may not be recoverable.

Both FRS 102 and FRSSE 2015 (both applicable for periods commencing on or after 1 January 2015), however, note that if an entity is unable to make a reliable estimate of the useful life of goodwill or intangible assets, the life shall be presumed not to exceed five years.

There are a couple of points to note here:

  • Existing UK GAAP requires an impairment review (and hence the likelihood of impairment) where things have happened that mean the goodwill (an asset on the balance sheet) may not be recoverable.
  • New UK GAAP needs you to be able to make a reliable estimate to use a period in excess of five years for a useful economic life.
  • For many, the coming months may bring the last accounts being prepared under the current GAAP, before new UK GAAP springs into life. Preparers of accounts need to:

  • Be aware of existing accounting requirements and the multiple implications of carrying non-recoverable assets on the balance sheet (or indeed the multiple implications of writing them off); and
  • Look at their justification for the 'reliable estimate' of useful economic life of these assets going forward and assess the impact where they cannot now make a reliable estimate of useful economic life.
  • From an audit perspective, the auditors should be assessing not just the application of, but also the basis for useful economic lives being used and whether their client has assessed whether events or circumstances indicate that the carrying value may not be recoverable.

    This is just one of many areas where new UK GAAP will bring the application of current requirements into sharp focus and whilst the useful economic life may have been longer than the 12 days of Christmas, questions will still need to be asked about whether accounting policies and the carrying value of goodwill can be justified.

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