Goodwill Accounting Changes Damage Board Performance, Profits and Dividends

UK Plc is damaged, yet again, by the overly rigid application by our regulators of EU rules.

The accounting standard, FRS102, forces UK companies and their boards of directors to amortise all intangible assets through the annual P&L.  However, those companies and directors operating under an IFRS accounting environment would not have to do this.

IFRS accounting allows boards of directors to review the total value of its intangible assets across the group, by apportioning total goodwill across each group company and comparing the “carrying value” of the intangible assets within each company, against the future prospects of that company.  Provided the carrying value within each company, in the opinion of the directors, is justified by the future prospects of that company, there would be no IFRS requirement to amortise the intangible assets.

This would mean that companies using IFRS accounting would outperform companies with the same operational performance criteria that are using FRS accounting, assuming both companies have made substantial acquisitions.  Of course the lower profits will lead to lower dividend,s as dividends can only be paid out of distributable profits.

Both of the above would tend to those boards of directors operating under IFRS accounting, look as if they were delivering superior performances and results, compared to boards of directors operating under FRS accounting rules, assuming that they both made acquisitions and otherwise had similar operational figures.