Goodwill

reader

I was reading an article by Steve Collings on accounting web:

http://www.accountingweb.co.uk/article/frs-10-goodwill-and-intangible-assets/532017

and he writes the following:

"The objective of FRS 10 is to ensure that goodwill and intangible assets capitalised in an entity’s balance sheet are charged to the profit and loss account over their useful economic lives."

"Many practitioners have been criticised by their professional body over recent years for inappropriately recognising internally-generated goodwill on a balance sheet, particularly when a client incorporates."

Worst still, Ann Fairpo writes:

"If you incorporate a business, it should be possible to get the 4% quasi-amortisation deduction for the goodwill of the business if and to the extent that you can persuade HMRC that the goodwill isn't personal to the individual whose business is incorporated, or attached to a property, or otherwise unavailable. My understanding of the accounting standards (which is definitely subject to challenge, as I'm a lawyer!) is as in the article - that the company should not (under accounting standards) be putting the goodwill on the balance sheet and amortising it."

I always thought you could "capitalize" goodwill, i.e. DR Non-current assets and CR Director's Loan Account. Am I missing something?

Steve Collings

Hi Reader

I understand that this article has the potential of blowing up all sorts of differing opinions re tax treatment following accounting treatment etc. etc. Please be aware that my article was PURELY related to accounting standards and what the accounting standards specifically say about internally-generated goodwill. I believe the tax issues are quite grey in this area and I cannot offer any advice on such taxation issues, though I believe Ann Fairpo has offered a 'in a nutshell' reply.

Best wishes

Steve

reader

Steve Collings wrote: »

Hi Reader

I understand that this article has the potential of blowing up all sorts of differing opinions re tax treatment following accounting treatment etc. etc. Please be aware that my article was PURELY related to accounting standards and what the accounting standards specifically say about internally-generated goodwill. I believe the tax issues are quite grey in this area and I cannot offer any advice on such taxation issues, though I believe Ann Fairpo has offered a 'in a nutshell' reply.

Best wishes

Steve

Thanks for your response Steve. I prepare accounts using the FRSSE so does FRS 10 still apply to me?

To someone who can offer advice on taxation issues, how would a practitioner go about "get the 4% quasi-amortisation deduction for the goodwill" if there is no goodwill on the balance sheet in the first place.

Essentially, would I have to keep a note of the goodwill valuation in my file, amortise it by 4% and then put the amortised amount into the CT600 as a deduction on taxable profits (i.e. keeping the goodwill and amortisation well away from the accounts)?

Steve Collings

Hi Reader

Entities preparing accounts under the FRSSE (effective April 2008) will not have to apply FRS 10, but it is important to emphasise that the FRSSE is merely a scaled down version of the standards and the FRSSE takes exactly the same stance where goodwill is concerned at paragraph 6.11 in that internally generated goodwill will not be capitalised.

Regards

Steve

reader

Steve Collings wrote: »

Hi Reader

Entities preparing accounts under the FRSSE (effective April 2008) will not have to apply FRS 10, but it is important to emphasise that the FRSSE is merely a scaled down version of the standards and the FRSSE takes exactly the same stance where goodwill is concerned at paragraph 6.11 in that internally generated goodwill will not be capitalised.

Regards

Steve

Thanks a lot, Steve.

And I thought an article headed "FRS 10" was going to be boring (how wrong was I!!!!).

cornflower

This is awful news for us as we always capitalise goodwill because of its nature. Our senior partner was (and still is) under the impression that tax treatment always prevails over anything. Needless to say this article has thrown up all sorts of problems for us and I suspect a lot of pre year adjustments.

reader

cornflower wrote: »

This is awful news for us as we always capitalise goodwill because of its nature. Our senior partner was (and still is) under the impression that tax treatment always prevails over anything. Needless to say this article has thrown up all sorts of problems for us and I suspect a lot of pre year adjustments.

I suspect if prior year adjustments are made in light of FRS 10/Steve Collings (lets say DR DLA and CR Goodwill), a lot of directors' loan accounts will become overdrawn and a lot of amended CT600s for the S455 tax which have to be submitted (unless dividends are back dated).

cornflower

OMG that just does not bear thinking about. My boss has just rang ICAEW technical helpline to confirm all of this and it seems that goodwill passed on to a business on incorporation is classed as internally generated unless evidence is available specifically to the contrary so Steve Collings and Ann Farepo are both right. We were hoping there may be some concessions-exemptions.

Monsoon

Woah, what?!

Aside from the obvious issues re Dr Goodwill Asset and Cr DLA... Where do you put it then? Or do you just not put it down at all? And is the tax treatment then totally separate?

This is just totally in contradiction to anything I have ever learned (and would probably just ignore it if it wasn't for the fact that Steve wrote it ).

Argh?

reader

Is anyone going to do a PYA? And submit amended CT600s?

Monsoon

Can you imagine the can of worms for a client who incorporated with goodwill 5 years ago?! :crying:

Steve Collings

The problem with goodwill is that it is inherently very grey! It should really be called 'badwill' where we are concerned!

In a nutshell an asset (tangible or intangible) can only be recognised on a balance sheet if "future economic benefits will flow to the entity" i.e. the entity will receive another form of asset from the asset it has already capitalised and the value of the underlying asset previously capitalised has a cost that can be measured reliably.

Internally generated goodwill falls down on my latter point because of the inability to ascertain a reliable market value. In reality hardly any intangible assets have a readily ascertainable market value and those that do are extremely unlikely to have been developed internally. The goodwill a sole trader/the accountant may suggest the business has immediately prior to incorporation will almost certainly have no readily ascertainable market value and this is the reason why such a prohibition was included in the standard. The standards go even further into this issue and say that a readily ascertainable market value derives its value from:

1. an asset belonging to a homogeneous population of assets that are equivalent in all material respects; and
2. an active market in those assets, evidenced by frequent transactions.

Hope that helps.

Steve

reader

Steve Collings wrote: »

The problem with goodwill is that it is inherently very grey! It should really be called 'badwill' where we are concerned!

In a nutshell an asset (tangible or intangible) can only be recognised on a balance sheet if "future economic benefits will flow to the entity" i.e. the entity will receive another form of asset from the asset it has already capitalised and the value of the underlying asset previously capitalised has a cost that can be measured reliably.

Internally generated goodwill falls down on my latter point because of the inability to ascertain a reliable market value. In reality hardly any intangible assets have a readily ascertainable market value and those that do are extremely unlikely to have been developed internally. The goodwill a sole trader/the accountant may suggest the business has immediately prior to incorporation will almost certainly have no readily ascertainable market value and this is the reason why such a prohibition was included in the standard. The standards go even further into this issue and say that a readily ascertainable market value derives its value from:

1. an asset belonging to a homogeneous population of assets that are equivalent in all material respects; and
2. an active market in those assets, evidenced by frequent transactions.

Hope that helps.

Steve

I've done my own research and it appears that "Internally generated goodwill and intangible assets should not be capitalised."

Therefore would you suggest that capitalised internally-generated goowill be removed from accounts by a PYA?

deanshepherd

Unless I am missing something blindingly obvious..

..an incorporation is not internally-generated goodwill it is purchased goodwill.

Salomon v. A. Salomon & Co. Ltd anyone?

As you were.

Monsoon

deanshepherd wrote: »

As you were.

Would it be inappropriate to say I love you at this juncture?

The tax breaks associated with goodwill on incorporation have been industry standard since I've been doing this job. The thought of changing that doesn't bear thinking about.

Steve: the sole trader who incorporates will declare the purchase price as a capital gain. The company has bought it, so surely it's got to go somewhere on the accounts?

Steve Collings

Hi Monsoon,

I cannot get into the tax side of things - I don't know what tax legislation says on this matter as I am not a tax expert.

Dean's point is correct - if it can be demonstrated that it is PURCHASED goodwill, then no problem. Purchased goodwill has a place on the balance sheet, which is what my article says. Internally-generated has no place on a balance sheet, which again is what my article says! My point about firms being criticised by professional bodies is that files contain NO evidence that goodwill is PURCHASED, merely slapped on the balance sheet with no regard to the accounting standards and was usually set at £30k!

Best regards
Steve

Julia

I think you need to be careful with what you class as purchased as well. Sorry to play devils advocate but goodwill that is transferred on incorporation is internally generated. If a business incorporates how can it have goodwill as it is a new business? I agree with Steve that the accounting side is one thing but tax treatment is another and the tax treatment never overrides accounting standards.

deanshepherd

Julia wrote: »

..goodwill that is transferred on incorporation is internally generated.

I don't know what you mean by 'transferred' but if a sole-trader sells his business to a company (albeit his own one) then that is purchased goodwill.

deanshepherd

"Many practitioners have been criticised by their professional body over recent years for inappropriately recognising internally-generated goodwill on a balance sheet, particularly when a client incorporates."

I suspect what is really being criticised is the lack of proper procedure and not that goodwill shouldn't be recognised at all.

jamesm96

deanshepherd wrote: »

Unless I am missing something blindingly obvious..

..an incorporation is not internally-generated goodwill it is purchased goodwill.

Salomon v. A. Salomon & Co. Ltd anyone?

As you were.

I've not read any of this thread until just now. I'm so glad you said this Dean (and yet also a bit disappointed that I didn't say it myself) because I thought I was going mad; capitalisation of Goodwill on incorporation is as a result of the purchase of the business as from an unincorporated business.

Capitalisation of internally generated goodwill would be a valid issue if the Ltd co. started from scratch, and then tried to capitalise it's Goodwill ten years later; that's not allowed. But that's not what we're talking about.