Goodwill and Intangible Assets - was issued in December 1997. At the same time, SSAP 22, the previous Accounting Standard which dealt with the subject of accounting for goodwill, was withdrawn. SSAP 22 allowed purchased goodwill to be written off directly to reserves as one amount in the accounting period of purchase. FRS 10 does not permit this treatment.
Invest plc has a number of subsidiaries. The accounting date of Invest plc and all its sub- sidiaries is 30 April. On 1 May 1998, Invest plc purchased 80% of the issued equity shares of Target Ltd. This purchase made Target Ltd a subsidiary of Invest plc from 1 May 1998. Invest plc made a cash payment of £31 million for the shares in Target Ltd. On 1 May 1998, the net assets which were included in the balance sheet of Target Ltd had a fair value to Invest plc of £30 million. Target Ltd sells a well-known branded product and has taken steps to protect itself legally against unauthorised use of the brand name. A reliable esti- mate of the value of this brand to the Invest group is £3 million. It is further considered that the value of the brand can be maintained or even increased for the foreseeable future. The value of the brand is notincluded in the balance sheet of Target Ltd.
For the purposes of preparing the consolidated financial statements, the Directors of Invest plc wish to ensure that the charge to the profit and loss account for the amortisation of intan- gible fixed assets is kept to a minimum. They estimate that the useful economic life of the purchased goodwill (or premium on acquisition) of Target Ltd is 40 years.
Requirements
(a) Outline the key factors which lay behind the decision of the Accounting Standards Board to prohibit the write-off of purchased goodwill to reserves.
(b) Compute the charge to the consolidated profit and loss account in respect of the goodwill on acquisition of Target Ltd for its year ended 30 April 1999.
(c) Explain the action which Invest plc must take in 1998/99 and in future years arising from the chosen accounting treatment of the goodwill on acquisition of Target Ltd.