Fair Dues: Many People Underestimate the Significance of the Shift to Fair Value Accounting in the Process of Converging International Accounting Standards. Hugh Osburn Offers Some Perspectives on Value. (Finance IAS)

By Osburn, Hugh | Financial Management (UK), May 2003 | Go to article overview

Fair Dues: Many People Underestimate the Significance of the Shift to Fair Value Accounting in the Process of Converging International Accounting Standards. Hugh Osburn Offers Some Perspectives on Value. (Finance IAS)


Osburn, Hugh, Financial Management (UK)


The International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board issued a memorandum of understanding in October 2002 that locked the two bodies into a long-term collaboration project on convergence. They anticipated that this process would be halfway through by next month.

Sir David Tweedie, the IASB's chairman, said that the memorandum represented a significant step towards a global set of accounting standards "that investors can trust". His emphasis on investors--that is, the users of accounts rather than employees or those preparing the accounts--is an interesting distinction.

The process of convergence in international accounting standards (IAS) is associated with a major change in practice: the shift to "fair value accounting". Most people, however, remain unaware of the likely significance of this shift. Although the idea that the treatment of intangible assets for tax purposes should be consistent with the accounting treatment seemed innocuous, the change introduced by the UK last year in the taxation of intangibles--itself a reflection of the broad process of convergence--is already having a direct impact on the valuation of real estate, for example. This impact can be attributed to the new treatment of negative goodwill--that is, the excess of the appraised fair value of interests in an acquisition over the price that's paid.

Under the new ED3 proposals, negative goodwill is written off to the profit and loss account as taxable income upon acquisition. Before this change, there was no penalty imposed on UK firms or their valuation consultants for a failure to take account of economic obsolescence when valuing real estate or plant. There was therefore every incentive not to do so, resulting in some optimistic values in the accounts of many companies.

The existence of negative goodwill on the balance sheet was previously condoned by UK accounting standards. British and Irish companies were an anomaly, because they were able to amortise such negative goodwill over a number of years, declaring enhanced profits without incurring a penalty as a result. Most countries do not permit negative goodwill to be declared for tax purposes, except under strictly limited circumstances.

A common misconception held by many people in Europe is that the process of convergence is dominated by the requirements of the US, and that the IASB and the local accounting standards boards in each country meekly follow America's lead. In fact, the US is moving a long way towards the positions previously adopted in Europe and, in particular, the UK.

The US has already conceded that there is a need to move towards adopting accounting standards based on principles rather than rules. …

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