Almost £21bn of M&A activity recorded under IFRS by FTSE 100 companies was put down to goodwill, a situation that hoodwinks investors, according to the world's largest independent brand valuation consultancy.

Following a record year in the M&A market, Thayne Forbes of Intangible Business said: ‘The FTSE 100 spent £40bn of shareholders' money on acquisitions last year and failed to explain what over half of this expenditure was for.

‘IFRS 3 was designed to demonstrate to investors how their money was being spent on acquisitions. Our research clearly lays bare the fact that the UK's major companies, from banks to retailers and insurance companies to TV networks, are systematically failing to comply with IFRS 3. As a result the accounting for business acquisitions is still opaque, and creative accounting is still occurring.'

The survey covered 88 of the FTSE 100 which filed in the first year of IFRS up until March 2006.

The remainder had either not filed or were reporting under different standards. The Intangible Business MD put a ‘ back of the envelope' figure of £80m on the amount that had been spent on companies' efforts to comply with the business combinations standard:

‘The specialist skills needed to undertake the implementation of IFRS 3 has cost these companies an estimated £80m. We consider that these are largely wasted costs given the lack of usefulness of the information.

‘This may be because this is the first year of adoption of FIRS 3 and there has been a learning curve. We consider that now is the time to addresses how these resources will be deployed going forward to ensure that the benefits provided are in proportion to the costs incurred.'

Forbes believed that the under reporting of intangible asset such as brand name and customer base, coupled with the high levels of value in goodwill and the general lack of disclosure made it difficult for shareholders to assess whether the acquisition had generated any value for the company, pinpointing the reason for the situation.

‘Higher levels of intangible lead to greater amortisation charges in a company's profit & loss balance sheet and a larger exposure to impairment charges in the future. The tests for impairment on intangibles have become much more stringent, so it's clearly a sensitive area. Impairment charges are always badly received by shareholders when an unexpected loss is made in and acquired asset.

‘The most important step is for companies to stop taking refuge in the previous accounting climate, which said, "goodwill can't be explained" - I think that the factors contributing to goodwill can be detailed to a greater extent.

‘Intangibles should also not be given some understated value that can't be understood by someone that knows the application of the brand in the market. There's a danger that this might set a precedent, so the situation needs to be addressed.'

Forbes concluded: ‘If these regulations are to have a significant impact on company reporting, it is clear there needs to be a body with specific responsibility for policing IFRS 3, like the SEC does in the US. IFFRS 3 has opened a new era of creative accounting and I can only hope that this report serves as a catalyst for improvements.'