• Watch out when reporting intangibles
• Identify and measue intangible assets
• Learn lessons from the Brewin Dolphin scenario

The recent finding by the Financial Reporting Review Panel on the reporting by Brewin Dolphin Holdings highlights a growing risk to business.

Thayne Forbes, joint MD of Intangible Business, the brand valuation consultancy, says that financial statements which do not report intangible assets correctly will be criticised. Brewin Dolphin owns one of the largest independent private client investment managers in the UK. Listed on the London Stock Exchange, its accounts for the year ended September 30, 2007 reflected the acquisition of investment management businesses totalling £8.7m in the year. These acquisitions were accounted for entirely as goodwill.

“The FRRP’s principal concern was that the customer related intangible assets were not separately recognised as required by IFRS 3 'Business Combinations' and IAS 38 'Intangible Assets',” says Forbes. Following the FRRP enquiry a statement was published and contained detailed amendments to Brewin Dolphin’s prior year figures and its practices going forward.

He adds: “The international standards IFRS 3 (R) and its predecessor IFRS 3 have been in force for a number of years now and are designed to improve the transparency of acquisition accounting. Before this there had been a tendency to lump a large amount of the acquisition price into goodwill. The idea of IFRS 3 (R) was to give a greater analysis of this goodwill by allocating value to identifiable intangible assets and requiring a description of the factors comprising residual goodwill – which Brewin Dolphin failed to do.

”Because of these standards intangible assets are now included to a greater extent in financial standards. There are limitations: only acquired intangibles are reflected; and subsequently only impairment adjustments down can be made. Forbes says that a proper analysis and transparent reporting of acquisitions has the beneficial effect of deterring poor acquisitions, or highlighting them earlier once they are made.

“A critical part of this is the identification and measurement of intangible assets acquired and a description of residual goodwill. As the relevant accounting standards have been in place for some time now there is widespread recognition of the validity of the methodology and benefits from the analysis, it is commonly referred to as a Purchase Price Allocation (PPA). These PPAs have been on the agenda for some time now and it should be on every acquisition checklist: what is the PPA likely to look like? It should also merit some more time and emphasis in financial reporting. It can be used, for example, to rebut a common presumption in the investment community that acquisitions destroy value."

Forbes warns that FDs should ensure that sufficient attention is given to accounting for intangible assets gained from acquisitions, “to avoid the embarrassing and potential damaging situation that Brewin Dolphin now finds itself in.”

Click to view the FRRP's statement regarding Brewin Dolphin