Historically, in the United Kingdom, and elsewhere, purchased goodwill did not penalize earnings because it was eliminated against (i.e., charged directly to) reserves (i.e., shareholders’ equity).* However, now, for periods ending after Dec. 22, 1998, FRS 10** radically alters the accounting for purchased goodwill and allied intangible assets. The pronouncement creates a refutable presumption that such assets have a useful life of not more than 20 years and the portion of a purchase allocated thereto must be amortized (i.e., as a charge against earnings) over such useful life. The presumption can be rebutted with the possibility that the asset has an indefinite life and, thus, its carrying amount need not be amortized if: * The “durability” of the acquired business (in the case of goodwill) or intangible assets is adequately demonstrated, and * Such asset is capable of continued measurement so that mandatory annual impairment reviews are feasible. For this purpose, durability depends on factors that relate to, among other things, the nature of the business, the stability of the industry, the life spans of the products to which goodwill attaches, the “market entry barriers” overcome by the acquisition which continue to exist, and the expected future impact of competition. Moreover, the asset is deemed not capable of continued measurement (so the test for effective permanent capitalization is not satisfied) if: * The acquired business has been merged with an existing business, rendering the goodwill incapable of “tracking;” * An entity’s management information systems cannot adequately identify and allocate cash flows to business units; or * In the unlikely event the amounts involved are not material. It is, at this point, unclear how these proposals actually will operate in practice. Presumably, the allure of attempting to demonstrate an indefinite useful life, and avoid amortization, will be powerful but this attractiveness will be tempered by the concurrent need to perform annual, not event-triggered, impairment reviews. Accordingly, it seems entirely possible that most U.K. acquirers will wind up amortizing purchased goodwill and other intangibles against earnings. n *The result was similar to what a U.S. LBO buyer accomplishes through “recap” accounting. **Goodwill, previously eliminated against reserves, need not be reinstated and amortized over its remaining useful life.A painful TwistAcquirers in the U.K. historically have been ableto wipe out acquisition goodwill in one swoop bycharging it against shareholders’ equity. No more.Starting in December, goodwill, in most cases,must be amortized over a 20-year period againstearnings – much like in the U.S. The key out isthat buyers have the opportunity to demonstratethat goodwill and related assets have indefinite useful lives – but that means a time-consuming annual audit to ensure that they have not beenimpaired.The change in the U.K.’s rules on accounting for acquisition goodwill could have a significant impact on acquisitions by British companies in the U.S. English acquirers are among the most active foreign buyers in the U.S. and almost all of their deals are done for cash, which requires purchase accounting treatment that inevitably leads to acquisition goodwill.The log of in-bound British acquisitions over the last five years:The British were the most active in-bound acquirers in 1993 and 1994, and second to Canada from 1995 to 1997. They led in dollar value in every year except 1997, when Canadian buyers took first place. No. of ValueYear Deals ($ bil)1993 89 $9.91994 94 18.31995 124 11.51996 145 16.21997 136 11.6<\TBL>

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