Want to Write Goodwill Off Over a Longer Term? Beware the New FRSSE
It used to be that accounting standards allowed you to a maximum of 20 years to write goodwill off over.
If you acquired goodwill from a connected person and therefore cannot claim tax relief on its write-down then your priority turns to not allowing the write-down to make a mess of your profit and loss account. You are therefore motivated to decide that your goodwill will last for, say, 20 years.
There is a new Financial Reporting Standard for Smaller Entities (FRSSE) that comes in in 2015 that reduces that maximum term down to just 5 years.
This has the potential to wreak havoc in the accounts of those who have previously gone for more than 5 years. Not only do you have to make a one-off write-down to adjust the rate of amortisation, the new standard tells us that that adjustment must be made to bring you in line as if you had always used 5 years. So, if you’ve got £500k of goodwill that you bought 5 years ago and you chose 20 years as your term, you will have to hit your accounts with £375k in one year. Ouch!
If this applies to you, you should first know that the new standard is for accounting periods beginning on or after the 1st January 2015. If you change your financial year-end to the 30th December 2014, other than giving your accounts software a deliciously painful headache, you will delay the effects for as long as you can.
Thereafter, you need to get thinking about that reliable estimate you made that led you to 20 years. You remember that report you compiled that looked at the longevity of the product you sell, of the market you trade in, of your customer base, of the location you trade from and of the age profile of the key persons in the business? Well, you need to find that report quick. The new standard says that if you have a reliable estimate, you can use whatever term that estimate says you should make, and that is the only way to a number beyond 5.