The 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.
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One of the purposes of the capital resources requirement is to reduce the probability of consumers suffering loss, or markets being disrupted, as a result of financial failure. Goodwill is the difference between the price paid by a company for a business and the book value of that business. It is an asset which most likely cannot be readily converted into cash and is often only realized when a business is sold.
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Staff Attorneys, IBLS Editorial Board