NEW YORK-The Financial Accounting Standards Board, Norwalk, Conn., met March 7 to begin consideration of approximately 250 formal comments about its controversial proposal to eliminate accounting for mergers as pooling of interests.
The pooling of interests method records the value of a merger as the sum of the book value of the assets of the two companies in the combination.
“[This gives] no recognition at all to the price one company actually paid to acquire another,” FASB Chairman Edmund L. Jenkins said in testimony March 2 before the U.S. Senate Committee on Banking, Housing and Urban Affairs.
“So, the true cost of the transaction is never revealed to investors, and they have no ability to track the company’s investment over time.”
The Senate committee has no jurisdiction over the independent Financial Accounting Standards Board, but it does have authority over the Securities and Exchange Commission.
“FASB is all about protecting consumers of financial information. [They] need credible, transparent and comparable information for effective participation in our capital markets,” Jenkins told the Senate committee.
FASB will consider comments presented at the Senate committee hearing and at its own hearings in San Francisco and New York earlier this year. By dollar volume of recent merger activity involving domestic companies, particularly in the high-technology sector, pooling of interests is the most common accounting method used, Jenkins said in September when FASB unveiled its plan. Bell Atlantic Corp. and GTE Corp., for example, accounted for their merger this way.
“We estimate our process will be complete and a final statement issued by the end of 2000,” Jenkins said.
Once 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 worldwide is the purchase method. According to this, one company is identified as the buyer and records the company being acquired at the cost it actually paid to acquire it. The excess of the purchase price over the fair market value for the acquired company’s net assets is known as good will, 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. Good will 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.
In reaching the conclusion last year to propose the abolition of the pooling method, FASB said in a release that 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.”
