Goodwill – to amortise or not – that is the question

There are some interesting differences between the way in which goodwill and other intangibles are accounted for under FRS 102 compared to existing UK GAAP. One of these is whether or not goodwill should be amortised.

The objective in FRS 10 is to ensure that goodwill and intangible assets are charged to the profit and loss account in the periods representing their useful lives. FRS 10 presumes that the useful economic life of intangibles and goodwill would not exceed 20 years but the presumption may be rebutted if it is possible to justify a longer or indefinite useful economic life. Where there is a limited useful economic life, they should be amortised systematically over their useful life. Where these assets are regarded as having an indefinite useful economic life they should not be amortised.

This treatment will have been adopted in many instances where a business has been incorporated. For example, consider a partnership providing professional services which decides to incorporate. It may very well find that the two key items within the balance sheet post incorporation are goodwill and loans to directors. Not wanting to end up with net liabilities the company convinces itself that goodwill has an indefinite life and decides not to amortise.

New UK GAAP sets out a different framework for determining useful economic lives of goodwill and other intangible assets. FRS 102 (19.23) states:

"Goodwill shall be considered to have a finite useful life, and shall be amortised on a systematic basis over its life. If an entity is unable to make a reliable estimate of the useful life of goodwill, the life shall not exceed five years."

As a result, under the new UK GAAP regime, goodwill is to be amortised. An indefinite useful life is not an option. This may have a significant effect on the balance sheet of the above business which has incorporated.

There is a 'get out of jail' card for entities wishing to avoid amortisation. This is to move away from new UK GAAP and adopt international accounting standards. Sadly this is not a pick and mix, so the entity would have to move to IFRS lock stock and smoking barrel.

You might also find it useful to refer to a previous blog post, written by David Smith on the subject of goodwill amortisation. This compares FRS 102, FRS 10 and the FRSSE. http://blog.mercia-group.co.uk/2014/12/22/the-season-of-goodwill-amortised-over-20-years/