Changes In Acquisition Accounting In The New SORP
How will the changes in the new SORP affect the way RPs treat acquisitions?
With all the talk of component accounting it may surprise you that there are some other changes afoot in the new statement of recommended practice (SORP) which could be of significance to some associations. One such change that has not been as well publicised to date is in relation to the treatment of acquisitions.
When an acquisition is made the recognised assets and liabilities of the acquired association are measured at fair value at the date of acquisition. For instance, housing properties will normally be recognised at existing use value for social housing.
In the RP sector it is not unusual for acquisitions to be made by way of a transfer for engagements for negligible consideration and often for no consideration at all.
Under the current SORP, where the fair value of the acquired is higher than the consideration given, negative goodwill is created, which is shown separately on the face of the balance sheet in 'capital and reserves'. The SORP gives very little opportunity to release negative goodwill and in all likelihood it will be released very slowly, if at all, and will remain as a distinct and separate reserve forever.
The feedback during the current SORP consultation was that the concept of negative goodwill did not reflect the true substance of the transaction undertaken. It was also recognised that the use of the terminology 'negative goodwill' led to confusion within the sector, especially with the contradictory use of the word 'negative' for a transaction which strengthened the net asset value of the association.
The proposed revised treatment under the new SORP will be to scrap the concept of negative goodwill. The acquired assets and liabilities will still be included at fair value but where the consideration given is lower than the fair value the resulting credit will be treated as a donation and included on the income and expenditure account within turnover.
For acquisitions that have been undertaken in previous years, the new guidance will create a change in accounting policy. Depending on the final text in the revised SORP, this may therefore lead to a prior year adjustment and the transfer of any negative goodwill to the income and expenditure reserves. However, even if RPs are not required to restate, it may still be sensible to do so and should not be too problematic.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
