WASHINGTON Merging banks that want to combine their books have about six months to do so before accounting rulemakers ban pooling of interests.
In a unanimous vote, the Financial Accounting Standards Board on Wednesday decided to eliminate pooling, projecting that by late June a deal would have to be recorded by the acquiring company as a purchase. The board also decided to continue developing a compromise alternative that would alter the guidelines for purchase accounting to soften the blow to the balance sheets of companies making acquisitions under the new rules.
Banking industry representatives reacted to the decision, which observers have long considered inevitable, with both displeasure and resignation.
James E. OConnor, tax and accounting counsel for Americas Community Bankers, said that his organization remains convinced the status quo is preferable. There are situations where pooling is appropriate for both small banks and large banks, he said. We believe the pooling options should have remained open.
The purchase method of accounting requires companies to recognize the difference between the price paid for an acquisition and the acquired firms actual book value. The difference is known as goodwill. Purchase accounting requires the acquiring firm to subtract the amount of goodwill from its earnings over a period of 40 years or less.
Many businesses, particularly in the financial services industry, prefer the pooling method because it allows the two firms to simply combine their balance sheets, with no impact on earnings.
The FASB had been under intense pressure from industry groups to change its approach to goodwill accounting, and in the end it compromised, proposing to let companies carry it on their balance sheets as an asset unless it is impaired, having declined in value. In the event of impairment, the amount of the decline would have to be written off.
In a press release issued after the board meeting, FASB chairman Edmund L. Jenkins explained the ruling. Without the information that the purchase method provides, he said, investors are left in the dark as to the real cost of one company buying another and, as a result, are unable to track future returns on the investment.
The boards proposed amendment to the purchase method, he said, reflects the underlying economics of business combinations by requiring that the current values of the assets and liabilities exchanged be reported to investors.
Expressing the American Bankers Associations disappointment with the decision, ABA chief lobbyist Edward L. Yingling said, Every merger is not a purchase, and the banking industry is very concerned about the loss of poolings. Pooling accounting provides useful information for certain types of business combinations.
Though unhappy with the elimination of pooling, Mr. Yingling said that ABA supports the move to allow goodwill to be held as an asset unless it falls in value. This change is expected to make purchase accounting more meaningful to users of financial statements.
A major unresolved issue is how companies will be expected to test assets for impairment. The board said it would issue a draft proposal in mid-February and allow 30 days for comments. A preliminary proposal issued last month would have required companies to assign goodwill to various business units and to measure it periodically for impairment.
According to FASB project manager Kim Petrone, the draft issued next month will be more detailed but will not vary substantially from the original proposal.
The board said that it expects to issue a final rule on the subject of merger accounting by the end of June. With publication of the final rule, the purchase method would become the only way to account for mergers under generally accepted accounting principles.
Ms. Petrone said that any deal initiated before issuance of the final rule, including those that have been announced publicly but not completed, could be accounted for using the pooling method.
