The Financial Reporting Council in the UK has just published a Review of Goodwill Impairment Disclosures. This 13 page document is prefaced by the explanation that
"Economic conditions have deteriorated significantly since the start of the credit crisis in August 2007. Financial markets continue to be stressed and many commodities have been subject to high price volatility. These conditions are having a significant effect on a wide range of businesses with many reporting reduced sales volumes and reduced margins.The FRC's review team has examined the December 2007 annual reports of 32 UK entities within the top 350 UK listed companies. Companies were selected if they had reported significant amounts of goodwill in their annual financial statements. The review does not address specific IP rights, but does examine the different methodologies employed in financial reporting of goodwill impairment.
These reductions mean that for many businesses the assumptions used to estimate the value of goodwill will need to be revised. The purpose of this review is to highlight areas of reporting of goodwill that will need to be enhanced as companies cope with the current environment.
In corporate reporting terms, the consequence of these changes in economic conditions may be an immediate need to write down the value of goodwill. For others there may be a need for additional disclosures to explain that the value of goodwill has decreased closing the gap on its book value, and that the likelihood of impairment losses in future has increased".
