John Selwood’s Q&As - Transitioning to FRS 102
This month John tackles an issue many auditors will not want to face but will probably come across during the transition to FRS 102: the useful economic life of goodwill and other intangible assets.
Q: A company currently uses 20 years as the useful economic life (UEL) for goodwill. Management has considered the impact of FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland on this estimate and they have concluded that a five-year life is more appropriate. This is a huge change so what audit evidence do I need to obtain to support this new UEL?
A: If you were to choose not to think about this too much, it could be very straightforward. As auditors, you could just focus on obtaining audit evidence to support the new UEL of five years. When preparing accounts using FRS 102, a five-year life will not be uncommon, because this is the maximum life where the UEL cannot be reliably estimated.
It is worth noting that five years is the maximum rather than a default, and the absence of reliable evidence regarding the UEL does not absolve management from considering whether a life shorter than five years might be appropriate. Equally, the existence of a five-year maximum in the absence of reliable evidence does not absolve management from seeking out evidence that might support a longer life were they to bother looking for it..
This is an extract from an article in the October 2014 edition of Audit & Beyond, the magazine of the Audit and Assurance Faculty.
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