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John Selwood Q&As

This month John returns to the thorny audit issues arising from the transition to FRS 102 and the useful economic life of goodwill

Q) My audit client has goodwill on their balance sheet where the useful economic life (UEL) has previously been determined at 20 years. Does FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland require the entity to reduce the UEL to five years and what are the mechanics of reducing this to five years? In particular, when do the five years begin and when should the amortisation first be accelerated?

A) As this was the most common question from delegates at the faculty roadshow during 2014, I have tried to answer it on a number of occasions. I use the word 'tried' because I am never entirely satisfied with the answer and it often seems a little simplistic. But this continues to be a hot topic, so I will try to make things as clear as possible or, failing that, to give some sort of structure to the uncertainties.

In my view, an easy mistake that auditors make in these situations is thinking that every entity using a UEL of 20 years has the same problem with the same solution. I see four different scenarios that are possible, and some of them have multiple solutions. The key to auditing this area is looking at the evidence to determine which scenario is present. In all these scenarios I have assumed that management has elected to use the FRS 102, Section 35 exemption not to restate goodwill at transition, which will usually be the case.

This is an extract from an article in the April 2015 edition of Audit & Beyond, the magazine of the Audit and Assurance Faculty.

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