Amortizing Goodwill
Choosing a Standard
New Legislation

Amortizing Goodwill

Under current legislation in the Netherlands there are three methods of treating the acquisition of goodwill:

  • on-balance, with amortization (depreciation) over a number of years via the profit and loss account, usually through a linear system;

  • by immediate amortization of the entire goodwill amount, via the profit and loss account; and

  • by immediate amortization from the company's equity.

The second method is never used. The advantage of the third method is that future profits remain unaffected by the amortization of goodwill, the company's net asset value does not show any goodwill and the presentation of the company's net asset value would be on the conservative side. However, it is usual to take acquisition of goodwill on-balance, with amortization over a number of years via the profit and loss account. This method is mandatory under the rules of the International Accounting Standards Board (IASB). However, a discussion is ongoing as to whether an annual impairment test should be required.

Choosing a Standard

Dutch accounting law is based on EU directives, in particular the fourth and seventh company directives, as amended. These directives are implemented in the Dutch legal framework so as to provide flexibility to international groups and conglomerates. These groups and conglomerates are thus able to apply the accounting standards of other jurisdictions (eg, the United States' generally accepted accounting practices or US GAAP) to their companies in the Netherlands. In 1995 the European Commission decided that Europe should no longer create its own European accounting standards, and it was decided that the standards of the IASB should become the European standard. This resulted in a proposal to designate the International Accounting Standards (IAS), which will in time become the International Financial Reporting Standards, as the mandatory standards for consolidated accounts of listed companies (most likely in 2005).

Newly proposed legislation in the Netherlands will enable companies to adopt the IAS in preparing their annual accounts for the years 2001 and onwards. At present the use of US GAAP for Dutch companies is generally allowable, as long as it does not conflict with Dutch law. However, in future the Netherlands will be bound by the European legislation that will make application of the IAS mandatory.

New Legislation

The intention to introduce IAS as an optional accounting standard in the Netherlands prompted a few changes to the existing accounting legislation. After recent amendments EU directives now allow the IAS to be applied. In particular IAS 39, which provides that financial instruments must be valued on the basis of actual value, no longer conflicts with the fourth and seventh company directives, as amended.

The proposed changes include the following:

  • A company can apply the standards of the IASB in its annual accounts;

  • The incorporation cost and costs related to the issuance of shares, to the extent booked as assets, must be written off in five years;

  • Research and development cost and the cost of goodwill, to the extent booked as assets, must be written off over their expected lifetime; and

  • Acquired goodwill can no longer be written off in one amount, but must be entered as an asset and amortized in accordance with the third point above.

Choosing to apply the accounting standards published by the IASB is without prejudice to the overall governing principle of Dutch accounting law. The annual accounts must provide the necessary insight into the company's net asset value, its result and - if possible within the nature of annual accounts - information about its solvency and liquidity. Moreover, only standards that accord with the various relevant EU directives may be applied. In general, this will not present a problem. However, it may be that certain facilities presently allowed by the IAS will not be available under Dutch and EU law: this will limit the choice of alternatives offered by the IAS. It is not possible to apply only some IAS: the IAS must be applied as a whole. Cherry picking just a few favourable IAS rules is not allowed. Obviously, the choice for IAS must be clarified in the annual accounts.

The incorporation cost and costs related to the issuance of shares, if booked as an asset, must be written off in five years or less. The cost of research and development may be written off over a longer period, related to the effective use of the asset. The IAS presumption is that these costs have a life span of 20 years or less, although counter proof may be possible. IAS 38 allows that certain assets that are not fixed assets (eg, goodwill) and that are developed in-house, be booked at actual value. This is not possible under the current Dutch law because it conflicts with the fourth company directive. (This is an example of a facility under the IAS that will not be available under the new Dutch law.) Because valuation at actual value for these assets is only one of the alternatives under the IAS, and not the recommended method, this should not present a problem under IAS 38.

As mentioned earlier, two of the three methods of treating the acquisition of goodwill in the Netherlands will be discarded. In the future, acquired goodwill must be booked as an asset, and amortized over its expected life span. This may be up to 20 years or longer in exceptional circumstances. The Netherlands' Council for Annual Reporting, a private accountancy branch organization, already includes this method in its current guidelines. Although these guidelines have no legal status they are not without authority, as the council is formed of experts including representatives from employers, employees and accountancy organizations. The government's present view is that amortization in one amount, rather than over the expected life span of the goodwill, may still be possible under current legislation. However, there must be special circumstances indicating this method and obviously this must be made clear in the annual accounts. The new rules also have a corporate governance angle: by booking acquired goodwill as an asset, shareholders can better assess the effect of an acquisition on future profitability, and therefore form a view on an acquisition's merits.

Most of these changes came into force on January 1 2001 with the exception of the new rules on the treatment of acquisition goodwill, which will come into force as of January 1 2003 (assuming that this draft act is adopted in 2002).

For further information on this topic please contact Jack Berk or Nelleke Krol at Loyens & Loeff by telephone (+31 20 578 5134 or +31 10 224 6631) or by fax (+31 20 578 5807 or +31 10 412 5839) or by email ([email protected] or [email protected]). The Loyens & Loeff website can be accessed at