GOODWILL & CAPITAL RESOURCES POLICIES IN THE UNITED KINGDOMThe United Kingdom Financial Services Authority (FSA), an independent body that regulates the financial services industry, announced that January 14, 2008, will be the last day in which the value of goodwill may be used when calculating a company’s capital resources.
The decision to require the deduction of goodwill in the capital resources calculation was based on the FSA's view that an authorized firm should only count assets on which customers and creditors can rely, and that goodwill is unlikely to have significant value as capital in the event of a firm's insolvency. This is primarily because goodwill is an asset which cannot be readily converted into cash and is susceptible to large fluctuations in value. Firms conducting insurance mediation and/or mortgage activities will then have to meet the capital resources requirement after deducting goodwill in arriving at their capital resources.
The following questions have been addressed in this article:What does business goodwill mean?
What is stated in Principle 4 of the fundamental obligations of firms under the regulatory system for businesses of the Financial Services Authority?
Why cannot brokers count goodwill as part of their regulatory capital after 14 January 2008?
What should a firm do if it foresees that after 14 January 2008 the deduction of goodwill will result in it having a capital resources deficit?