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Electronic copy available at: http://ssrn.com/abstract=2027713
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Accounting for Intangible Assets in Public
Limited Companies in Malawi
Brian Phiri Kampanje
Accounting and Finance Department – Blantyre International
University
Email: kampanjeb@yahoo.com
Postal Address: Blantyre International University, Private Bag 98, Blantyre, Malawi.
Type of Paper: Research Paper – March 2012
Abstract
Intangible Assets are becoming increasingly important in the global perspective as we are in
the middle of the information age. Global investors are anxious to invest in firms which
demonstrate abilities to grow rapidly and reward investors with high returns in form of
meaningful capital gains and acceptable dividend payout. Consequently, there is ever
increase in demand for mergers and acquisitions as means of accelerated growth and
diversification. Acquirers are being prompted to pay high consideration in exchange for
control of activities in acquirees. Substantial goodwill assets have been recorded in recent
times with mixed reactions on the achievement of acquisition objectives.
Possession of physical assets such as land, plant and equipment is no longer gateway to
growth of entities. Businesses are continuously being challenged to develop intangible
assets as means of surviving, grow and gaining competitive advantage in the turbulent and
dynamic global economic environment.
The study under review demonstrates that no listed company in Malawi recognises and
accounts for goodwill in the statement of financial position despite business combinations in
the economy. The intangible assets are none existent in most listed companies in Malawi.
Worse still, they account for less than 1 percent of the total assets of the few companies
recognising intangible assets. The current scenario calls for urgent review of the accounting
principles used by listed companies in Malawi and verify whether there are consistent with
International Financial Reporting Standards which they claim to follow. Meagre intangible
assets indicate lack of innovation and development of human capital in public companies in
Malawi. Drastic measures are required to improve novelty and best practice methods in the
commercial environment in Malawi as means of increasing its capabilities to compete at a
global level.
Electronic copy available at: http://ssrn.com/abstract=2027713
2
1.0 Introduction
There are currently fourteen public limited companies listed on the Malawi Stock
Exchange – Malawi Stock Exchange (2011). A critical analysis of the annual reports
of those listed companies depict that very few of them recognize intangible assets in
their statement of financial position. Worse still, the intangible assets recognized by
the selected companies depict a negligible percentage of the total assets of a
company. All Malawian listed companies adopted International Accounting
Standards (IASs) which were further progressed to International Financial Reporting
Standards (IFRSs) as evidenced by their annual reports. The listing of Malawian
public limited companies is depicted in the table below.
Table 1: Names of companies listed on the Malawi Stock Exchange (adapted).
Name of company
Nature of Business
Status
Blantyre Hotels Limited
Hotel and tourism
Single
FMB
Banking and finance.
Holding Company
Illovo Sugar Malawi Ltd
Cane Sugar Manufacturer.
Holding Company
MPICO
Development, rental and
management of property.
Holding Company.
National Bank of Malawi
Banking and finance.
Holding Company but also
subsidiary of Press Corporation
Limited.
NBS Bank Limited
Banking and finance.
Holding Company but also
subsidiary of NICO Holdings.
NICO Holdings Limited
Diversified business portfolios.
Conglomerate with business
interests in Malawi and Africa.
National Investment Trust Ltd
Portfolio Management.
Single.
Press Corporation Limited
Diversified business portfolios.
Conglomerate with business
interests in Malawi and listed on
the secondary London Stock
Exchange.
Real Insurance Company
Insurer and Re-Insurance
Holding Company.
Standard Bank
Banking and finance.
Holding Company.
Sunbird Hotels Limited
Hotel and tourism.
Holding company.
TNM Limited
Cell-phone and internet Service
Provider
Single. Subsidiary of Press
Corporation Limited
Old Mutual Limited
Financial Services and
diversified business portfolios.
Conglomerate with business
interests in banking and
finance, insurance and
investment properties.
It is therefore imperative to explore whether there are negative consequences for the
current status quo and if proven, how the situation can be redressed.
1.1 What are intangible assets?
An intangible asset is an identifiable non-monetary asset without physical substance
– Association of Chartered Certified Accountants (2004:372). Institute of Chartered
Secretaries and Administrators (2006:37) defines intangible assets as assets that do
not take physical form such as development costs, goodwill and intellectual property
rights.
Electronic copy available at: http://ssrn.com/abstract=2027713
3
Intangible Assets draw a wide continuum of definitions from intellectual property law
to financial accounting with several disciplines within the two distinct schools of
thought. Miller et al (2008:46) intimate that intellectual assets can be broken into
three areas as shown below:-
Table 2: Classes of Intangible Assets
Intellectual property
Intellectual assets
Intellectual capital
Patents.
Trademarks/trade
names.
Copyrights.
Trade secrets.
Know-how.
Contracts.
Permits and licences.
Non-compete
agreements.
Human capital.
Customer capital.
Organisational capital.
Distributor capital.
Supplier capital.
Source: Adapted from Miller et al (2008:46)
International Accounting Standard (IAS) 38 cited in EC staff consolidated version
(2010) annotates the following: [An asset is a resource: (a) controlled by an entity as a result of
past events; and (b) from which future economic benefits are expected to flow to the entity….An
intangible asset is an identifiable non-monetary asset without physical substance.]. IAS 38
provides guidelines on the measurement and recognition of Intangible Assets as
noted below:-
Paragraph 11 - The definition of an intangible asset requires an intangible asset
to be identifiable to distinguish it from goodwill. Goodwill recognised in a business
combination is an asset representing the future economic benefits arising from
other assets acquired in a business combination that are not individually
identified and separately recognised. The future economic benefits may result
from synergy between the identifiable assets acquired or from assets that,
individually, do not qualify for recognition in the financial statements.
Paragraph 12 – As asset is identifiable if it either
a) is separable, i.e. is capable of being separated or divided from the entity and
sold, transferred, licensed, rented or exchanged, either individually or together
with a related contract, identifiable asset or liability, regardless of whether the
entity intends to do so; or
b) arises from contractual or other legal rights, regardless of whether those rights
are transferable or separable from the entity or from other rights and
obligations.
Paragraph 13 – Control - An entity controls an asset if the entity has the power to
obtain the future economic benefits flowing from the underlying resource and to
restrict the access of others to those benefits. The capacity of an entity to control
the future economic benefits from an intangible asset would normally stem from
legal rights that are enforceable in a court of law. In the absence of legal rights, it
is more difficult to demonstrate control. However, legal enforceability of a right is
not a necessary condition for control because an entity may be able to control the
future economic benefits in some other way.
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Paragraph 14 - Market and technical knowledge may give rise to future economic
benefits. An entity controls those benefits if, for example, the knowledge is
protected by legal rights such as copyrights, a restraint of trade agreement
(where permitted) or by a legal duty on employees to maintain confidentiality.
Paragraph 15 prohibits recognising skilled labour as intangible asset as there is
not real control to stop employee leaving. Paragraph 16 also prohibits
recognising a portfolio of customers or market share unless there is a legal
agreement to protect the relationship with customers and loyalty. Section 63
clearly stipulate that internally generated brands, mastheads, publishing titles,
customer lists and items similar in substance shall not be recognised as
intangible assets.
2.0 Focus of the study on Intangible Assets in Malawi
Based on the clarifications of IAS 38 above, the study focuses on the measurement
of goodwill and intellectual property only as intellectual assets and capital are not
permissible despite being justified by Miller et al (2008).
2.1 Basic understanding of Goodwill
Goodwill has been a controversial subject since early 1900s as narrated by Dunse et
al (2004:237) in quoting Lord MacNaghten in the House of Lords who delivered the
leading judgement on the meaning of the term “goodwill” on 20 May 1901[It is a thing
very easy to describe, very difficult to define. It is the benefit and advantage of the good name,
reputation and connection of a business. It is the attractive force which brings in custom. It is the one
thing which distinguishes an old-established business from a new business at its first start.]. It is
more likely that in business combination under IFRS 3, acquirer is likely to pay
higher consideration than percentage of net assets acquired as a token of
appreciation for the established business as noted by Scott (2008:61) who
postulates as follows [If asked to describe goodwill, traditional aspects such as product
reputation, skilled force, site location, market share and so on, spring to mind]. Objectivity in
determining goodwill could be crucial for acquirers of business as noted by Chatzkel
(2003:140) in quoting Roos of ICS Limited as follows; [. . . goodwill is a general term and
what underpins goodwill in one company is different from what underpins goodwill in another. But we
call them both the same. If goodwill is to be reported, then it will need to be understood and this leads
inevitably to intellectual capital and also to the disclosure of information about all types of resource,
since goodwill is generic.]. KPMG (2009:12) confirms the need for objectivity in
determination of goodwill as anticipated benefits as a result of business combination
might not be forthcoming; [Purchasers are willing to pay a control premium as there is often an
expectation that by gaining full control of the target, its operations can be more efficiently managed to
improve earnings expectations. In addition to control premiums, bid premiums are often paid when a
competitive bidding process develops during the sale of a company and the purchaser pays an
additional amount in order to secure the target ahead of rival bidders.
In practice, the success of an acquisition frequently falls short of pre-deal expectations, particularly
when measured against the objective of increasing shareholder value. A key reason for this seems to
lie in the high prices paid. Overly optimistic expectations of the future value of a potential target are
driven by overestimation of expected market growth rates, overestimation of synergistic value and
underestimation of integration costs. This results in excessive bid premiums being paid which
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generate high levels of goodwill and a significant risk of future impairment.]. Seetharaman et al
(2006) cited in Boekestein (2009:390) highlight fuzzy character of goodwill which is
often described as an amount of money paid in excess of the goods acquired.
2.2 Recognition and measurement of goodwill
Association of Chartered Certified Accountants (2004:383) defines goodwill as
follows; [Future economic benefits arising from assets that are not capable of being individually
identified and separately recognised – IFRS 3. Goodwill is any excess of the cost of acquisitions over
the acquirer‟s interest in the fair value of the identifiable assets and liabilities acquired as at the date
of the exchange transaction – IAS 22.......Negative goodwill arises when the acquirer‟s interest in the
net fair value of the acquiree‟s identifiable assets, liabilities and contingent liabilities exceeds the cost
of the business combination. IFRS 3 refers to negative goodwill as the excess of acquirer‟s interest in
the net fair value of acquiree‟s identifiable assets, liabilities and contingent liabilities over cost.]
Blaug and Lekhi (2009:28) observed as follows; [.....Essentially, it is the premium paid on
the combination. Goodwill, is however one of the most fragile intangible assets and can be eroded
quickly. For this reason goodwill from business combinations is not amortised but subject to annual
impairment testing.] Holt (2010) avers that [goodwill can be measured in two different ways:
1. Goodwill is the difference between the consideration paid and the purchaser's share of identifiable
net assets acquired. This is a 'partial goodwill' method because the non-controlling interest (NCI)
is recognised at its share of identifiable net assets and does not include any goodwill.
2. Goodwill can also be measured on a 'full goodwill' basis, which means that goodwill is recognised
for the non-controlling interest in a subsidiary as well as the controlling interest.
Goodwill is increasingly becoming an integral part of non-current assets of most big
corporate across the global. Hence cannot be ignored as highlighted by Dharan
(1996:1) who conveyed the following; [In recent years, however, the growth of the service and
“knowledge” sectors in the economy has changed the nature and extent of goodwill amounts created
by merger and acquisition transactions.... These unique characteristics of intellectual properties,
combined with the recent increase in the size of merger and acquisition transactions, have resulted in
the reporting of much greater magnitudes of goodwill in recent corporate financial statements. To
illustrate the extent of goodwill in corporate reports, Table 1 lists companies in the U.S. with the
largest goodwill-to-total-asset percentage. For brevity, the list includes only firms with goodwill in
excess of $1 billion.]. KPMG (2009:5) observed that [....The recent high volume of transactions
has strongly affected the balance sheets of companies reporting under US GAAP and IFRS. For
example, after purchasing Medimmune Inc. for approximately 15.7 billion U.S. dollars in 2007, the
IFRS balance sheet of AstraZeneca PLC recognised almost 8.1 billion U.S. dollars of acquired
intangible assets and 8.8 billion U.S. dollars goodwill. Likewise, after the acquisition of the Pfizer
Consumer Healthcare business for a purchase price amounting to 16.6 billion U.S. dollars, Johnson &
Johnson‟s US GAAP 2007 Annual Report disclosed acquired intangible assets of 8.8 billion U.S.
dollars (including R&D-projects with a fair value of 217 million U.S. dollars) and goodwill amounting to
6.5 billion U.S. dollars.]. KPMG (2009:12) further postulates [In percentage terms, the highest
allocation to goodwill can be seen in the Internet & E-Commerce (70.4%), Building & Construction
(68.4%) and Software (62.5 %) industries. The smallest allocation occurred within the Energy &
Power Generation (36.0%), Chemicals (36.2 %) and Financial Services (43.4%) industries. To explain
these results, the components of goodwill need to be examined.]
IFRS 3 brought substantial changes in accounting for goodwill as it prohibited
amortisation of purchased goodwill over a given period of time but rather undertake
impairment test on annual basis – Brännström and Giuliani (2009) and
Schultze and Weiler (2010). Advocates of IFRS-based approach to goodwill
reporting point to a range of putative benefits associated with the adoption of an
impairment testing-led approach to goodwill accounting and reporting, including
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evidence of the improved value relevance of impairment losses as compared to
annual amortisation charges – Li and Meeks (2006) and Carlin and Finch (2010).
If and only if, the recoverable amount of an asset is less than its carrying amount in
the balance sheet, an impairment loss has occurred and this loss should be
recognised immediately – Association of Chartered Certified Accountants
(2004:360). Impairment review is a formal test to be performed at a specified points
in time or after particular events have occurred, to ensure the assets carrying‟s value
has not fallen below its recoverable amount – Seetharaman et al (2004). Carlin and
Finch (2010:7870 annotates the following; [According to IAS 36 – Impairment Testing, this
process of cash flow modelling and value appraisal takes place not at the whole of enterprise level,
but rather, at the level of a subset of a firm‟s total activity base known as a cash generating unit
(CGU). A CGU is the smallest group of identifiable assets generating cash flows from continuing use
which are substantially independent of the cash flows from other assets or groups of assets.]. There
are certain conditions which suggest that impairment exists, including significant
underperformance relative to historical or projected future operating results,
significant changes in the manner of the company‟s use of underlying assets and
significant adverse industry or market economic trends – Sevin and Schroeder
(2005:48). IASB (2004:13) sighted in Comiskey and Mulford (2010:752) lists external
and internal sources which can trigger impairment loss. External sources being
market value declines; negative changes in technology, markets, economy or laws;
increase in market interest rates; and company stock price is below book value. The
internal sources encompassing; obsolescence or physical damage; asset is a part of
a restructuring or held for disposal; and worse economic than expected.
2.3 Review of the impairment test on goodwill
Comiskey and Mulford (2010:746) insinuated that while impairment assessments are
required, the standards themselves provide only limited guidance on what
constitutes a triggering event and how an impairment charge should be measured.
They concluded that at a minimum, assessments of goodwill impairment, limit the
comparability of results across firms. Wines et al (2007:867/868) nevertheless
provided a detailed account of advantages of impairment test of goodwill. An
adapted version is provided herein as follows; [
A problem of the amortisation method relates to time period estimation. An estimate of the useful
life of goodwill becomes less reliable as the length of the useful life increases (Waxman, 2001).
By being based on an actual valuation of goodwill, the IFRS-based standard‟s impairment testing
policy moves away from an arbitrary assessment of useful life.
Another advantage is the interrelationship with the intangible asset financial reporting standard. It
was noted earlier that Wines and Ferguson (1993) provide evidence that management had, in
earlier times, recognised identifiable intangible assets to reduce the impact on reported profit of
the requirement for goodwill amortisation. ........there is now more clear guidance for companies in
this area.
The overall advantage, from a balance sheet perspective, is that the valuation of goodwill will be
more closely aligned to a real assessment of asset value, rather than reflecting an arbitrary “cost
less accumulated amortisation” calculation. Also, from an income statement perspective, any
recognition of a loss as a result of a write-down in the valuation of goodwill will be more closely
aligned to a real economic decline in value rather than an arbitrary amortisation calculation. The
new treatment should therefore be more aligned with the decision-making needs of financial
report users.]
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Conducting a detailed impairment test on every applicable asset and associated
goodwill at the end of each reporting period will in many cases, be time consuming
and costly – McGreachin (1997), Rockness et al (2001), Wines et al (2007) and
Schultze and Weiler (2010).
2.4 Intellectual Capital – Patents, Copyrights and Trademarks
With emergence of the knowledge-based and innovation driven era, today‟s
companies increasingly rely on intangible assets, also referred to as intangibles or
intellectual assets, in their value-creation process – Arvidsson (2011:277). She
further postulates; [This shift in the value-creation process, from tangible assets to intangible
assets, is argued to be manifested in an increasing gap between companies‟ market and book value
(Lock Lee and Guthrie, 2010; Holland, 2001; Stewart, 1997; Sveiby, 1997).].
Organisation of Economic Development and Cooperation (1999) sighted in Guthrie
(2001:29) defined Intellectual Property as [the economic value of two categories of intangible
assets of a company: organisational (structural) capital; and human capital. More precisely, structural
capital refers to elements like proprietary software systems, distribution networks and supply chains.
Human capital includes human resources within the organisation (i.e. staff resources), and resources
external to the organisation (namely customers and suppliers).]. Roos et al (2001:23) bring new
dimension of intellectual resources as follows; [But over the last few years, a consensus
seems to have been formed of dividing intellectual resources into three different groups: (1) Human
capital, comprising the competence, skills and intellectual agility of the individual employees. (2)
Relationship capital, which represents all the valuable relationships with customers, suppliers and
other relevant stakeholders. (3) Organizational capital, including processes, systems, structures,
brands, intellectual property and other intangibles that are owned by the firm but do not appear on its
balance-sheet.].
IFRS specifies that development expenditure that meet certain criteria are
capitalised as intangible assets under international standards – Rodgers and Housel
(2009:342). This study however focuses on the final product of research and
development which can yield patents, copyrights and trademarks as these can be
easily sold to third parties or defended in the court of law where infringement occurs
unlike development expenditures.
Institute of Chartered Secretaries and Administrators (2006) provide definitions
relating to intangible capital as follows;
UK Patents office defines a patent as follows [A patent for an invention is granted by
government to the inventor, giving the inventor the right for a limited period to stop others from
making, using or selling the invention without the permission of the inventor. When a patent is
granted, the invention becomes the property of the inventor, which – like any other form or
property or business asset can be bought, sold, rented or hired.].
The UK Patent Office defines a trade mark as [Any sign which can distinguish the goods
and services of one trader from those of another. A sign includes, for example words, logos,
pictures, or a combination of these. Basically, a trade mark is a badge of origin, used so that
customers can recognise the product of a particular trader. To be registrable your trade mark
must be: distinctive for the goods or services which you are applying to register it for and not
deceptive, or contrary to law or morality and not similar or identical to any earlier marks for the
same or similar goods or services.].
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Copyright – unlike trademarks and registered designs, copyright is unregistered
right. Copyright comes into effect immediately, as soon as something that can be
protected is created and “fixed” in some way, for example, on paper, on film, via
sound recording or as an electronic record on the internet.
2.5 Accounting for Intellectual Capital
Dunse et al (2004:240) states [international accounting standard, IAS 38 (IASC, 1998), requires
that an intangible asset should be recognised if two criteria are met. First, if it is probable that the
future economic benefits that are attributable to the asset will flow to the enterprise and, second, if the
cost of the asset can be measured reliably.]. A reporting entity should therefore be able to
demonstrate the cost incurred in developing an intangible asset such as patent,
trade mark or copyright. IAS 38 stipulates that an intangible asset shall initially be
recorded at cost. Association of Chartered Certified Accountants (2004:376)
expound that a reporting entity has a choice on the subsequent measurement of
intangible asset. This can be carried at its cost less any accumulated depreciation
and less any accumulated impairment losses. Alternatively it can be carried at a
revalued amount, which is its fair value at the date of revaluation less any
subsequent accumulated amortisation and any subsequent accumulated impairment
losses.
The tangible assets in form of intellectual property must be depreciated over their
useful lives – period which economic benefits are expected to flow to the owner.
Institute of Chartered Secretaries and Administrators (2006) stipulate that Patents
have a statutory restriction period of twenty years. Patents can therefore be
depreciated the earlier of twenty years or up to the time economic benefits can no
longer flow to a firm in view of the patent held. The trademarks can be protected
intangible assets so long as the owners pay renewal fees to appropriate authorities.
Trademarks can have indefinite useful life subject to payment of renewal fees.
Copyrights can last up to seventy years from the date developed. All the intellectual
property will be subjected to annual impairment test as with the case of goodwill.
2.6 Risks associated with intangible assets
Chatzkel (2003:132) quotes Low as stating the following [As far as requirements for a
viable IC/intangibles business model, the crucial requirement for a business model based on
intangibles is the ability of all employees, especially management to understand the correlation
between those intangibles and financial outcomes. This is true for intangible products or services like
bandwidth, in which Enron attempted to create a market, but it is even truer for the intangibles that
drive business performance like brand, alliances, and strategy execution. ...... However, where Enron
deviated – and deviated does appear to be the correct word – was its failure to link those intangibles
to financial outcomes. Doing so would have provided management with a clearer and earlier
quantitative assessment of the risks and rewards offered by their forays into trading new commodities.
Such an assessment would also have provided guidance to how the capital markets, on which they
depended for sustenance, would value such efforts. Finally, such analysis, combined with corporate
governance policy based on transparency, would have provided investors with information that might
have altered their rhapsodic view of the company‟s prospects.]. Chatzkel (2003:143) however
concludes that it was not the tangible intensive business model that flawed, but
rather that the problem lay with behaviours of manipulation and intentional
deception.
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3.0 Research questions
a) What is the level of value of goodwill in the financial statements of listed
companies in Malawi?
b) What is the nature and extent of intellectual property in public limited companies
in Malawi?
c) What could be the limiting factors to full development of intellectual property in
Malawi?
3.1 Research design
The study focussed on the census as there are only fourteen listed companies in
Malawi. Data collection was in form of document analysis through annual reports
which provide detailed financial information of the data subjects in compliance with
Malawi Companies Act (1984) and International Financial Reporting Standards. The
annual reports used were for a three year period from 2008 to 2010.
4.0 Findings
a) Goodwill was not reflected in the financial statements of all listed companies in
Malawi.
b) The intangible asset recognised by some listed companies comprised of
computer software only. The first pie chart indicates the results of the individual
listed companies in Malawi indicating that 50 percent of the listed companies
recognise computer software as intangible asset. The other half did not recognise
any intangible assets in their statement of financial position. Second graph has
eliminated subsidiaries of the holding companies to eliminate double counting.
This indicates 64 percent of listed companies on the Malawi Stock Exchange do
not recognise intellectual property in their statement of financial position.
Graph: 1 Graph: 2
Table: 3 Percentage of Intellectual property against total assets.
Recognition of Intangible Assets
Recognise Copyright and
developmen t cost
Does not rec ognise
Copyright and
developmen t cost
Revised Recognition of Intangible
Assets eliminating groups
Recognise Copyright and
developmen t cost
Does not rec ognise
Copyright and
developmen t cost
Company A Company B Company C Company D
Value of Computer Software - MK 147,870,000 1,646,000,000 9,585,000 25,000,000
Total Value of Non-Current Assets - MK 75,766,528,000 114,463,000,000 829,824,000 55,152,000,000
Intangi ble Assets/Total Assets % 0.20 1 1 0.05
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5.0 Discussions
This section intends to synthesize the findings above with the available literature to
establish causality and effect of the current scenario in Malawian capital market.
5.1 Accounting for Goodwill
It is rather peculiar that no single Malawian company listed on the stock exchange
recognise and account for goodwill. This is against the backdrop of the adoption of
the IASs/IFRSs since 2001 which coincided with substantial acquisitions in Malawian
history. Information regarding acquisition of subsidiaries in Malawi is usually very
vague in the financial statements. Absence of goodwill on business combination
could entail either immediate writing off goodwill in the financial year of acquisition or
negative goodwill. It would be an extremely rear event for an acquirer to advance
consideration equivalent to the value of percentage of net assets acquired.
Woolf (1990) and Seetharaman et al (2004:131/132) observed that accounting for
goodwill is subject to abuse in various ways. Acquirers may opt to seek court‟s
permission to write off goodwill against share premium account; writing off goodwill
against nothing at all, creating a negative “goodwill write off reserve” which can linger
indefinitely as a dangling debit, leaving other reserves and earnings intact; and
writing off goodwill against revaluation reserve (which is now prohibited in some
countries). Wines et al (2007:865) note that goodwill write-off can be used for
creative accounting in form of profit smoothing and “big bath” purposes. There is one
company which is ever increasing cost of its shareholding in subsidiary in a
significant disproportional manner – increase in shareholding by 1% increase in
subsequent years exceeded cost of obtaining majority shareholding in an original
transaction despite economic conditions in Malawi being stable in terms of inflation,
interest rates and foreign currency exchange rate.
Negative goodwill can arise as a result of errors in measuring the fair value of either
the cost of the combination or the acquiree‟s identifiable net assets but can also
arise as the result of a bargain purchase – Association of Chartered Certified
Accountants (2004:383). Bargain purchase could arise when there is anticipated
future under performance of the acquired firm - Brännström and Giuliani (2009).
Evidence suggest that one holding company recognised a negative goodwill of
MK2,422,000,000.00 (US$17,300,000.00) in two major acquisition in a period of less
than fifteen months. The negative goodwill was passed on to income statement. In
both scenarios, the fair value of the assets were subjected to fair value adjustments
after negotiations with counter parties had already taken place. Either way the
goodwill figures for Malawian listed companies are more likely to be bogus or
business combination transactions are not concluded at arm‟s length transaction
resulting in realisation of substantial negative goodwill passed on to the income
statement as profit.
5.2 Intellectual Property
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Only 36 percent of the listed companies in Malawi recognise computer software in
their financial statements. The computer software is purchased under copyright
agreements and effectively renting it over a period of time. The intellectual property
is a negligible part of the total assets of listed companies as highlighted in the table 3
above. This is not a realistic view. There are several public limited companies in
Malawi utilising international trademarks from multinational companies. The value of
such intellectual property is not currently reflected in the financial statements. Listed
companies might be significantly undervalued. There was a famous case around
2007, when the High Court in Malawi ordered a private limited to stop selling its fruit-
flavoured squash under a name similar to one used by one the listed companies in
Malawi. This is good evidence that Malawian listed companies are aware of the
importance of intellectual property but perhaps not ready to realistically value them.
This could also be the reason for absence of substantial goodwill in statement of
financial position of listed companies in Malawi.
The status quo is not healthy for the local economy because it is not promoting
research and development which are key ingredients for economic growth and
intellectual enhancement. Malawian companies will not be able to produce high
quality products and effectively compete on the international arena if current status
persists as expenses could skyrocket if ambitious programmes are to be rolled. It is
important to promote intellectual capabilities with strategic view of tapping and
utilising intellectual property as means of attaining and sustaining competitive
advantage.
6.0 Conclusion and recommendations
Regulatory authorities of Malawi Stock Exchange should investigate the reasons for
absence of goodwill in all public limited companies and to enable it satisfy itself of
the adherence to IFRSs and best practice methods in account for goodwill.
Government of Malawi through Ministry of Industry and Trade should encourage
listed companies in Malawi to consider intellectual property purchased or otherwise
as means of encouraging innovation in Malawi and be instrumental for development.
Lack of support for innovation can be attributed to Malawi being a net importer while
exporting raw or semi-processed products fetching lower value on the international
market.
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References
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