WASHINGTON - Standards setters who are now debating details of a long-awaited proposal to change merger accounting rules have voted for a less onerous measure of the value of goodwill in merged companies, a move actively sought by banking groups.
The Financial Accounting Standards Board last year said it intended to do away with the pooling-of-interests method of accounting for mergers and acquisitions, which lets companies merge their assets and liabilities with no effect on their earnings. The board has issued numerous drafts of a proposal that would put all such transactions under the purchase method of accounting, which requires the buyer to recognize goodwill - the difference between the purchase price of the acquired company and the net value of its assets - on its balance sheet.
In September, the board pleased banking trade groups when it indicated a willingness to drop a requirement that goodwill be amortized, or deducted from the merged company's earnings, over 20 years or less. The FASB argued that goodwill is a "wasting asset" that unavoidably loses value. Critics countered that in some cases goodwill can be shown to have maintained value over time.
In a compromise, the board agreed Thursday to let merged companies count goodwill as an asset unless it declines in value.
The arrangement requires that goodwill be tested periodically for "impairment," or loss of value, and that any such change be recognized on the company's books. A draft proposal issued in February would have required companies to identify the amount of goodwill allocated to each reporting unit and to do impairment tests at that level.
Industry representatives objected, complaining that under the FASB plan such testing would be overly burdensome. The accounting board defined reporting unit as "the lowest level of an entity that is a business and that can be distinguished, physically and operationally and for internal reporting purposes, from the other activities, operations, and assets of the entity."
In Thursday's vote, the board agreed to change the definition of reporting unit to let goodwill be allocated and tested at a higher level in the corporate hierarchy. Industry representatives said the change would lighten the compliance burden.
The board will vote on the final version of the rule on May 16, a FASB spokeswoman said, with a final rule expected to be issued by the end of June.
