NEW YORK-The Financial Accounting Standards Board, Norwalk, Conn., recently issued a proposal for public comment that would eliminate accounting for mergers as pooling of interests, which are the sum of the book value of their assets.
By dollar volume of recent merger activity, particularly in the high-technology sector, pooling of interests is the most common accounting method used, said Edmund L. Jenkins, chairman of FASB.
Pooling gives a misleading corporate earnings boost, which reflects artificial accounting differences, not real economic differences, the board said.
“In a pooling, an investor can’t tell what price was actually paid for the companies to merge, nor can they track the acquisition’s subsequent performance,” Jenkins said.
FASB seeks comments on its proposal by Dec. 7. It plans to hold hearings on the plan Feb. 3-4 in San Francisco, and Feb. 10-11 in New York. Copies of the plan are available on the organization’s Web site at www.fasb.org under the heading “Exposure Drafts.”
“We estimate our process will be complete and a final statement issued by the end of 2000,” Jenkins said.
If it is adopted, the FASB rule would govern accounting for business combinations initiated after publication of the final statement on pooling of interests.
By number of transactions, rather than their dollar volume, the most common method of accounting for mergers is the purchase method. According to this, one company is identified as the purchaser and records the company being acquired at the cost it actually paid to buy it. The excess of the purchase price over the fair market value for the acquired company’s net assets is known as goodwill, which is charged to the buying company’s earnings over time.
As part of its plan to eliminate the pooling of interests accounting method, FASB also would make one major change in the purchase method. Goodwill would be recorded as an asset, which should be amortized, or written off, against earnings over a 20-year period, down from the 40-year maximum in current practice.
“We believe that the purchase method of accounting gives investors better information about the acquisition’s performance over time than does the pooling of interests method,” Jenkins said.
“When two different accounting methods are used for what is essentially and economically the same transaction, it is confusing to investors.”
In reaching the conclusion to propose the abolition of pooling of interests, FASB said it took another key factor into consideration: “Business combinations are acquisitions and should be accounted for as such, based on the value of what is given up in exchange, regardless of whether it is cash, other assets, debt or equity shares.”
According to published reports, an ad hoc organization called the New Economy Two Thousand Coalition was formed this year to lobby on behalf of high-technology sector companies concerned about FASB’s proposed rules on business combinations. The NETT Coalition comprises The Technology Network, Palo Alto, Calif., and computer companies, including Cisco Systems Inc., Microsoft Corp. and Sun Microsystems Inc.
