I was one of the many FDs who was a little sad at the passing of SSAPs. They were short, sweet (well, apart from SSAP 26...) and I knew them all well. The same cannot always be said of the output of the Accounting Standards Board. However, brevity is not the only virtue in accounting rules.

An example came to mind recently: assets - and how to revalue them. I was reminded of one of my own tussles with the accounting standards on asset value by problems that MMO2 and Vodafone have had recently. MMO2 wrote off £6bn of the £10bn it had spent on 3G licencesbut Vodafone declined to alter the book value of its £14bn of 3G assets, confident it could make money from mobile internet services.

If two big, well-run and well-audited companies could take such radically different views on how much the same asset was worth, how are smaller companies meant to deal with similar tricky questions?

These are not academic concerns. Those of us who spend our lives dealing with companies that are teetering on the edge of disaster are pretty familiar with the prospect of insolvency - which is the real issue here.

I'm talking, of course, about the balance sheet test. The moment at which the company's liabilities exceed the value of its assets, it becomes technically insolvent. The 3G assets anomaly reminded me of one of my clients who had a brush with failing this test as a result of asset valuations. This medium-sized quoted company had a large portfolio of properties that were key to its trading success. The directors realised that with a downturn in trading conditions, the tangible fixed assets had probably decreased in value.

The directors were exploring every avenue to do their best by the shareholders, banks and creditors. One of the obvious routes was to realise some of the value in the property portfolio in a well-ordered disposal. Not all the sites would be sold. It came down to a question of net realisable value (NRV) versus present value of the future cash flows. As a first step in this calculation, the properties needed to be valued but the figures the surveyors came up with were materially less than the current carrying value of the assets in the balance sheet. What did this mean for the company and its financial reporting? Remember, this was a sensitive time for the company anyway, with the banks breathing down its neck. Reducing the value of the tangible assets would almost certainly have meant that the company would have broken its banking covenants, and could have resulted in liabilities outstripping assets - hence sparking off the key principle, which is that an asset is impaired when the business will not be able to recover the balance sheet value either through using it or selling it. In circumstances where assets might be impaired, a review should determine their cash generating abilities either through use or sale. The carrying amount has to be compared to the recoverable amount, which is the higher of the NRV - the figure our surveyor produced - or the value in use (VIU). The impairment review must be conducted, says FRS 11, at the operating unit, which in our case were the properties themselves.

"IT SURPRISED ME THAT THE STANDARD WORKED SO WELL. IT DOES FOLLOW ECONOMIC AND BUSINESS REALITY. WELL DONE THE ASB"

One of the techniques I have developed over the years in turnaround situations, is to ask different people in the company the same question and then sit back and listen to the different replies. This tried and trusted method was applied to the property valuation exercise. Ask the FD why the properties were being valued and the answer was clear: it was for balance sheet purposes. But ask the firm of surveyors who were hired to carry out the work, and the response was different: they were giving a figure for the value in today's open market.

If the property values exceeded the liabilities, then the company would pass the insolvency test. So the asset valuations were crucial. To decide how to advise the board, I had to go to FRS 11, the standard on the impairment of fixed assets and goodwill. I certainly had to read it properly for the first time, and I admit the FD was way ahead of me. (Perhaps understandably, the rest of the board had absolutely no idea what this was all about.)

FRS 11 has two objectives: to ensure that fixed assets are in the accounts at no more than their recoverable amounts; and that any impairment loss is measured and recognised on a consistent basis. We should cherish flexibility and comparability in our accounting standards.

The impairment review certainly required a great deal of work - but it was worth it. It came as a surprise to me that the standard seemed to work so well, in the sense that it follows economic and business reality - so hats off to the ASB. It didn't force us to be over-prudent writing down assets that had genuine value. Yet, nor did it allow us to keep carrying assets at a valuation that was nonsensical. The result of our impairment review was that there was no need for massive write-downs and we weren't pushed towards insolvency via a negative balance sheet. As such, I am happy to report, we lived to fight another day. Thank you, FRS 11!

But I'm still left wondering: how did MMO2 and Vodafone come to such different conclusions on 3G? REAL FINANCE JULY/AUGUST 2003