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Enoch Yiu

Mergers finalised before this year will not be affected by a controversial new rule, according to the Hong Kong Society of Accountants (HKSA).

It said listed companies would not have to change their accounting treatment of goodwill losses for mergers which took place before January.

This has removed a major concern with the market afraid many companies would have to report a loss if they had to adjust their accounting treatment of goodwill losses from past mergers.

Previous accounting rules allowed listed companies to use reserves to offset goodwill losses, or amortise the losses in their income statements.

Many listed companies preferred to offset goodwill against reserves as this did not have an impact on the profit and loss account.

But in January, a new accounting rule barred listed companies from doing this. It requires them to capitalise goodwill as an asset and amortise it over a period of up to 20 years.

'Where it is considered that the carrying amount of the goodwill is no longer recoverable, the estimated loss in value should be charged to the income statement,' chairman of the HKSA's financial accounting standards committee, Roger Best, said.

Pacific Century CyberWorks and China's largest personal computer manufacturer, Legend Holdings, are among those in the spotlight for their treatment of goodwill following key acquisitions.

CyberWorks wrote off the entire US$22 billion goodwill in its purchase of Cable & Wireless HKT against reserves when it reported its annual result in April.

The write-off put CyberWorks in a position of negative shareholder equity of US$1.8 billion.

Legend Holdings has about HK$1.9 billion in goodwill from the acquisition of Beijing Legend, the personal computer manufacturing arm of the Legend group, in November 1997.

However, Legend has yet to reflect the goodwill in its accounts.

If these companies needed to follow the new rule and put the goodwill losses in their profit and loss accounts, these would eat into their earnings.

Yesterday's HKSA decision has removed these worries.

'Enterprises that previously eliminated goodwill against reserves are encouraged, but not required, to restate it as an asset,' it said.

As a result, only goodwill losses arising from mergers from this year on will not be able to be offset by reserves.

'We do not believe that it is appropriate that past impairment losses should impact on future earnings,' Mr Best said.

However, if a listed company disposed of a subsidiary, the accounting rule required the goodwill held in reserves be added to the profit or loss.

Mr Best said 'the elimination of goodwill against reserves was not a permanent adjustment' and that ultimately, the cost of goodwill should be charged to income either through recognition of an impairment loss, or as part of the profit or loss on disposal.

'This results in an appropriate reflection of the true economic cost to the enterprise as a result of its decisions to buy, hold and sell the subsidiary at the amounts and within the time frame reported,' he said.

The HKSA also requires companies to make a separate disclosure about how they treat losses related to goodwill in their financial statements.



Previous method of treating goodwill in company accounts allowed to stand for past acquisitions