Goodwill and the difference arising on first consolidation

The treatment of the difference arising on consolidation has been both a subject of debate (especially in the English-speaking counties) and a source of international diversity in financial reporting. The implementation of the EU Fourth and Seventh Directives could be expected to reduce the amount of this diversity so far as member states are concerned. To a large extent, the directives imposed methods which were generally accepted in the English-speaking countries; for example, what is now known as the 'former German method' was excluded. Nevertheless, the Directives left a fair amount of flexibility; alternative practices, some generally accepted in the UK and others in the USA, were permitted. This paper compares the treatment of the consolidation difference in two EU member states, France and the UK, based on an analysis of five years' financial statements of a random sample of seventy companies, in each country (700 sets of financial statements in all). The research shows that, notwithstanding the harmonizing effects of the Directives, substantial differences exist between the French and British treatments. In general, French recommended treatments are quite close to those required by U.S. GAAP, with a major exception in the treatment of 'quasi-goodwill' items such as brands. By contrast, the UK treatments differ from the U.S. and French treatments in some important respects; they also fail to comply with the revised IAS 22. On the other hand, the UK requirements are clearly documented and mandatory; hence the level of compliance is very high. By contrast the French requirements are variously and not always consistently documented and only partly mandatory; the levels of compliance are consequently lower. There was some evidence that the choice of treatment in the UK, as between immediate elimination against reserves and capitalization and amortiz-ation, was influenced by the company's level of gearing. No such choice exists in France, so no comparable analysis was possible. The research suggests that, in the case of the consolidation difference, the EU Directives left an arguably excessive degree of flexibility of treatment, a problem which it has been left to the revised IAS 22 to address.