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Copenhagen Stock Exchange Focus 31: The Treatment Of Goodwill In The New Danish Company Account Act From The Investor's Point Of View

Date 23/10/2002

In many companies group goodwill is a significant asset and the value calculation hereof will inevitably come to influence the accounts and the users significantly.

In issue no. 31 of Focus, Mikkel Elsøe, MSc in business administration and auditing, Jyske Markets, describes the impact that the new Company Accounts Act will have on the blue-chip companies' presentation of accounts in relation to the new goodwill rules.

The increase in interest is probably due to the last few years' rapid growth in the service industry, which is often characterised by a low book value of capital and reserves compared with the corresponding market value of the company. Moreover, increased globalisation results in increased demand for cross-border reporting of financial information so that it will be possible to achieve more efficient international provision of finance, which requires more harmonised accounting principles.

Moreover, the author throws light on some of the problems that the equity analyst faces when he shall consider how to treat goodwill from the investor's point of view, as the analyst must be considered to be the investor's eyes and ears in the investment process.

The author discusses the various measurements of goodwill and concludes that the most considerable gain that investors will have as a result of the new Company Accounts Act is more standardised financial data. This makes comparability easier, when the investor shall make his investment decisions. However, legislators have chosen to give priority to trustworthiness over relevance, consequently, the information of the annual accounts will lose value as regards the investor's decision-making process.

Read the article 'The treatment of goodwill in the new Danish Company Accounts Act from the investor's point of view' in Focus no. 31.