Goodwill represents the difference between purchase price and fair value. Currently goodwill and other intangible assets can be dealt with in two ways. While the standard suggests that bought goodwill be written off against reserves immediately, it permits capitalization over the useful economic life of the goodwill. Reserves can be issued as shares to current stockholders. Infinite goodwill will be capitalized and reconsidered as to its value on an annual basis.
Provisions are reserve amounts allocated for future liabilities or losses in asset valuation.
ASB is concerned that companies are using the big bath method of taking big hits for reorganization costs and environmental claims in provision accounts in order to strengthen future earnings. ASB is now considering similar restrictions on provisions regarding timing and recognition as FRS 3 does on earnings. This means that Provision accounts for future operating losses, reorganization losses could be recognized only when the reorganization was actually implemented, and environmental liabilities recognized when the actual obligation to rectify the damage occurred. Under FRS 7, pre-acquisition provisions for restructuring costs and future losses are not allowed. Dividends are limited to accumulated realized profits minus losses for private companies.