An historical Introduction to the amortisation of goodwill in Spain
During the years leading up to the 2007 crisis, many Spanish companies acquired companies inside and outside of Spain. And they acquired them because they had a competitive advantage. That advantage was none other than the amortisation of goodwill in Spain.
In force since 2002, it had been declared illegal. It was in this way that Telefónica acquired the English entity O2, NH Hoteles merged with the Dutch group Krasnapolski, the Santander Group acquired the British bank Abbey National, and Iberdrola acquired Scottish Power, among other operations.
A society can be worth more than the algebraic sum of all the elements that make up its heritage. The reason can be found in the concept of goodwill. However, traditionally goodwill in Spain is not accounted for.
Goodwill is an asset with an important source of value for a company. In business acquisition processes it is usually the most attractive and critical point for buyers.
Law 22/2015, on Audit of Accounts, in force since 2016, has established relevant amendments that affect goodwill in Spain. Specifically, it has introduced (or rescued) the treatment for its amortisation.
Through what we present here, we intend to give a few touches about this important business asset and its current regulation.
What is Goodwill amortisation?
To explain it in a simple way, goodwill is the difference between the value of a company (according to accounting books) and the price paid for it.
Specifically, it is the asset resulting from a business M&A operation at a price higher than the book value of the acquired company. That is, the amount is calculated from the difference between the agreed value of the operation and the net value of the assets and liabilities delivered.
Therefore, goodwill in Spain only becomes evident in business M&As(sale of companies, merger, split …)
Regarding the elements that can make it up, we could highlight the following: (i) the customer portfolio (clientele); (ii) the prestige and recognition of the entity; (iii) Know-how; (iv) the location of the company; (v) the backlog of projects; (vi) the leads that are likely to become customers …
As an example, this explains how the amount would be calculated:
● Value of the total patrimonial elements of the company: 50 million euros.
● Price agreed for the acquisition of the company: 60 million euros.
● Value of goodwill: 10 million euros (60-50).
When should Goodwill be accounted for and amortized?
The regulation of goodwill in Spain, specifically its amortisation, has been subject to numerous changes in accounting and tax matters.
In this sense, the General Accounting Plan (PGC) of 1990 regulated that goodwill in Spain was an amortizable asset. That is, it had a definite useful life. In accordance with the accounting system, the tax regime allowed the same criterion allowing the deduction of amortisation.
However, in 2007, with the entry into force of the new PGC, the criterion changed. Goodwill was considered an indefinite useful life asset, eliminating its amortisation. Likewise, tax deduction for the amortisation of goodwill disappeared, notwithstanding the fact that the deduction of its correction for impairment was allowed for tax purposes. The aforementioned deduction was five per cent of the amount shown with the acquisition of goodwill.
Finally, almost 10 years later, the new Audit Law once again establishes the amortisation of goodwill in Spain, both in the accounting and fiscal areas.
Thus, under current legislation, goodwill is an intangible asset amortizable over its useful life.
In accounting terms, it is assumed that the useful life of goodwill is 10 years. As a result, an annual amortisation of 10 per cent of its value should be carried out.
For their part, tax regulations consider that the useful life of goodwill in Spain is 20 years. Therefore a five per cent share of its value can be deducted in the tax base of company taxes.
What is the implication of the new regulations?
The origin of this new regulation (applicable since 2016) can be found in the Directive 2013/34 / EU of June 26, 2013. In particular, in article 12.11 of the aforementioned European legislation.
The European legislator suspected that listed companies did not correctly record the damage that the economic crisis was causing to their image. In this line, it considered that some companies issued uncertain information of their financial statements. Consequently, this directly affected third parties who were interested in such documentation.
Regarding the regulatory change, it affects both large companies (listed or not) and SMEs.
The main consequence of this new regulation for companies is that, from 2016, they must amortise goodwill during its useful life.
This fact is appreciated as a “punishment” to the income statement of many companies. Thus, it implies that these entities must endow the amortisation of goodwill as an expense (accounting). In addition, they must submit an annual impairment test to the goodwill.
Likewise, many of these companies that have activated goodwill will have to reduce the distributable profit between the partners. And in some cases, they will even be forced to incur losses.
Prior to the entry into force of the new audit law, goodwill in Spain was not amortised. Its activation for the purpose of a business combination had no effect on the income statement, notwithstanding the fact that companies could deduct, in corporate tax, the amount corresponding to their deterioration. This had positive tax consequences that did not affect the results of the companies.
Starting in 2016, companies, including SMEs, had to amortise goodwill during its useful life.
The main objective of the previous obligations is that companies justify the existence of FdC in their assets.
● Goodwill is an intangible asset. The context in which it is usually revealed is that of business combinations. It is accounted for only when its value is externalized by virtue of an onerous acquisition.
● The new Audit Law has rescued the accounting and tax amortisation of goodwill in Spain. Therefore, it has effects for exercises beginning from January 1, 2016.
● In accounting, an annual amortisation of 10 per cent is presumed. Exceptionally, another percentage may be applied, provided that a life greater or less than 10 years is demonstrated.
● Fiscally, the deduction of amortisation of goodwill is allowed up to a maximum of five per cent per year.
● The different accounting and tax treatment will result in a negative temporary difference. A higher accounting expense than tax expense, which implies a deferral of the tax expense of goodwill amortisation in Spain.