NORWALK, Conn. - The Financial Accounting Standards Board said on Tuesday that it is ready to begin testing a plan that would take some of the sting out of its proposed ban on pooling-of-interest accounting for mergers and acquisitions.
The accounting group has made clear that it wants to put an end to the practice of accounting for acquisitions by simply combining the assets of the firms involved. The board originally wanted merger accounting to recognize the difference between the book value of an acquisition and the price paid for it - known as "goodwill" - and depreciate that amount regularly over time. In a conference with representatives of the American Bankers Association, the accounting group said it will examine the feasibility of a compromise floated last spring by banks and other financial services firms: that goodwill should be booked as an asset, but tested periodically to see if it has declined in value. A fall in value would require a corresponding writedown of the company's assets.
Project manager Kimberley R. Petrone said Tuesday that the board has "just put out a request" seeking participants in the test and is assembling the materials that the organization's personnel will need for site visits.
If an acceptable method of testing the impairment of goodwill is not found, merging companies could be required to amortize the goodwill over a period of 20 years.
The board has already pushed its target date for issuing a rule from the end of this year to the end of the first quarter of next year. Board chairman Edmund L. Jenkins emphasized in an interview Tuesday that the examination of an impairment test will not delay the rule further.
In the two-hour meeting with ABA officials, the board members also heard complaints and suggestions about how banks should be required to account for their loan-loss reserves and the board's nascent proposal to require that most of the assets on banks' balance sheets be recorded at "fair value."
The bankers took issue with a draft proposal that is being refined by the American Institute of Certified Public Accountants to bring banks' loan-loss-reserve accounting in line with Generally Accepted Accounting Principles. The FASB has final say over any pronouncements of the accountants' group.
A version of the proposal released in July would have allowed banks to reserve only against loans in which a specific impairment can be identified, effectively barring the use of unallocated reserves as a cushion. Banks and bank regulators have objected to the proposal, arguing that it would remove management's judgment from the assessment of the loan portfolio.
"The loan-loss process is really an art, and it has lot of imperfections," said Tim Journy, executive vice president and controller of Compass Bank in Birmingham, Ala. "But the task force document has turned it into a mechanical process, eliminating management judgment."
By eliminating banks' ability to allow for a range of error in calculating sufficient reserves, he said, the task force proposal may result in inaccurate assessment of the institution's true condition.
Mr. Jenkins advised the bankers that the most promising avenue for compromise with the accountants' group would be in the development of better models for assessing impairment of a loan portfolio. More accurate models, he said, would benefit banks attempting to set accurate reserve levels while coming closer to satisfying the task force's desire for rigorous accounting.
When asked about the fair value accounting issue, FASB project manager Ronald W. Lott said that further action by the board is unlikely before 2002. The board has decided to wait until a similar project, undertaken by an international accounting group, has been completed, and to incorporate its findings.
Fair value represents the price a buyer would pay for an asset on the current market. Banks currently hold many of their assets on a cost-accounting basis - meaning that their value is based on what they paid for the assets.