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April 30, 2008

Goodwill disclosures found wanting

Companies are still not providing sufficient disclosures on goodwill despite the introduction of the business combinations standard IFRS 3, a study revealed.

Brand valuation consultancy Intangible Business investigated how 500 of the world’s largest companies outside of the US and UK were adhering to IFRS 3, a standard that was designed to inject transparency.

In 2007, this group spent £226 billion ($338 billion) on 118 acquisitions in which 47 percent (£105 billion) of the value was allocated to goodwill.

Of this amount, 53 percent of goodwill (£57 billion) was not described, depriving investors of valuable information including why intangible assets could not be valued.

Less than a third of the value of goodwill was reported with a good description, the study added.

“What we found was that there’s a tendency to depress the value of the other assets, particularly the other intangible assets, consequently increasing the value of goodwill attributable to an acquisition. In tandem with that, we found very little explanation to what goodwill represented,” Intangible Business joint managing director Thayne Forbes said.

“The typical reason would be it gives them less exposure to write downs going forward because the rules for writing down other assets are more severe than they are for writing down goodwill.”

Signs of improvement

Forbes said he has seen some signs of improvement in the use of IFRS 3 although he would like to see better implementation and improved disclosure. He also supports the Financial Reporting Council’s focus on the issue.

“What I would be pressing for is more realistic valuations of the other assets and more explanation to what is left over which is goodwill,” he said.

“This is not difficult information to provide because if you buy a business you’ll have this information as part of your rationale for buying it.

“It is just a simple question of balancing up the need for more reporting against the cost of it and the confidentiality of it as well.”

Arvind Hickman

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