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.
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By GlobalData“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
