Accounting for goodwill: the only constant is change

Photo of spreadsheet calculations
By David Young, tutor

19 June 2017

There is a widespread belief amongst non-accountants that there can be only one ‘correct’ profit figure and one ‘correct’ balance sheet total. 

There is a hope amongst accounting students that once they have learned an accounting treatment that will be it for life and there will be no need for change. Neither is true, and accounting for goodwill is a great example.

When I was studying to become a CA, there was no accounting standard covering goodwill. Some groups would include it as an asset on the balance sheet while others would write it off to reserves. 

Few if any would amortise as that creates a debit to profit or loss.

The first appearance of goodwill in accounting

In the late 1980s, along came SSAP 22 Accounting for Goodwill and Intangible Assets – originally the Accounting Standards Board (ASB) had intended to demand amortisation but they got cold feet and permitted either immediate write-off or capitalisation and amortisation.

These are two completely different treatments – which produces the ‘correct’ figures?  

Eventually, the ASB bit the bullet and, in 1997, replaced SSAP 22 with FRS 10. This removed the write-off option and required amortisation, although it extended the possible write-off period and permitted an indefinite life. 

The indefinite life option has subsequently been withdrawn under FRS 102 so amortisation is now mandatory in the UK.

Meanwhile, the International Accounting Standards Board (IASB) had got fed up with amortisation and, in IFRS 3, forbid systematic amortisation and replaced it with an annual impairment review.

Three different treatments, three different profits, three different net assets – all ’correct’ in their own way and, of course, all showing a true and fair view!

Where to now?

If history is anything to go by, current standards will last for a while and then there will be another change. Back to an earlier treatment or perhaps to something completely new?

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  • CA Student blog

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