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Value of goodwill in acquisitions highlighted.

MANAMA: Intangible assets, such as brands, represented on average just 23 per cent of enterprise value, according to a report by professional services organisation Ernst & Young.

And 47pc of enterprise value was ascribed to goodwill in recent corporate transactions.

The report, 'Acquisitions accounting - What's next for you? A survey of price purchase allocation practices', examined how the transaction values of 709 companies across 21 countries were allocated.

With a high proportion ascribed to goodwill, many companies are placing a large percentage of enterprise value at risk of impairment under current volatile economic conditions.

"The accounting consequences of these acquisitions need to be carefully considered by acquisitions teams," said Ernst & Young head of valuation and business modeling services Jim Eales.

"For each transaction, International Financial Regulatory Authority (IFRS) standards require companies to fair value the tangible and intangible assets acquired.

"Tangible and amortisable intangible asset values will depreciate as per their life expectancy, affecting future earnings.

"In the current difficult economic conditions, the goodwill element becomes more susceptible to volatility and writedowns, which can have a significant impact on investor confidence and on the company's financial health."

Of the sectors that were identified, the consumer products sector had the highest average allocation of enterprise value to goodwill, with 65pc attributed to it.

The technology sector was next with 60pc allocated to goodwill. Tangible assets represented only 9pc of enterprise value in the consumer products sector.

Among the intangible assets actually recognised by the buyers, customer relationships and contracts were cited in 44pc of deals surveyed.

These assets are particularly important in the insurance and telecommunications industry, where transactions are often motivated by the purchase of a client portfolio.

Brand (31pc of transactions) and technology (20pc of transactions) are the other most often identified intangible assets.

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Publication:Gulf Daily News (Manama, Bahrain)
Date:Feb 26, 2009
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