The Hong Kong Society of Accounting (HKSA) has proposed new guidelines in a bid to prevent companies from manipulating accounts and misleading investors. In two draft proposals sent to HKSA members yesterday, the society aims to get local accounting standards into full compliance with international guidelines, said James Fawls, the HKSA's director of professional standards. The HKSA's draft proposal on the impairment of assets requires companies to disclose assets that have impairment losses under a prescribed set of guidelines. An impairment loss is the amount by which the book value of an asset exceeds the amount expected to arise from the use of the asset or its value on disposal. Companies would also be required to identify, measure and recognise impairment losses of assets under a common set of criteria. In addition, a proposed accounting standard would prohibit companies from writing down provisions on impairment losses against reserves in balance sheets. Instead, companies need to book impairment losses in profit-and-loss accounts. 'This is to avoid companies making excessive provisions in a good year and than writing them back in a bad one,' Mr Fawls said. He said 'cookie jug reserves', a practice that results in overstating or understating earnings, was carried out in the United States and Britain. Although it was not common in Hong Kong, Mr Fawls said, the HKSA wanted to take a 'preventive approach' to the problem by closing a loophole. The HKSA's draft proposal would be required to capitalise and amortise goodwill arising from an acquisition over its estimated useful life of not more than 20 years. At present, companies are allowed to treat goodwill - the premium above a company's fair value that the acquirer paid - such as making a one-off provision for capital loss from its reserve in the balance sheets. The lack of guidelines on the accounting treatments for impairment losses of assets and business combinations leaves room for abuse in the booking of a company's intangible assets, said Chris Chan, associate professor at the School of Business, Hong Kong University. The proposed accounting treatments, which book impairment losses and goodwill against a company's profit-and-loss account, can better reflect a company's revenue and operations during the accounting period, he said. Mr Chan also said the changes would benefit investors by giving them more disclosure about a company's asset valuations. 'The changes would move Hong Kong's accounting standards towards full compliance of international standards,' Mr Chan said.