WASHINGTON - With a proposal Wednesday on how to measure the value of goodwill in combined companies, accounting standards-setters took another step in their tortuous journey toward new rules for mergers and acquisitions.

But the 65-page document has some bankers concerned that, while the theory overall is good, in practice it may prove onerous.

The Financial Accounting Standards Board for more than a year has been aiming to do away with pooling-of-interests transactions, one of two common methods of accounting for mergers and acquisitions.

In a pooling transaction, merging companies simply combine their balance sheets, avoiding the necessity of accounting for the intangible values known as goodwill. Goodwill is the difference between a company's book value and the price another pays to buy it.

The standards board has long made it clear that it wants to eliminate pooling in favor of mandatory purchase accounting for deals. In purchase accounting, an acquirer would have to be identified, and the difference between the seller's book value and the price at which it is sold - the goodwill - would have to be amortized over a period of 20 years or less.

Bankers and others objected to the required amortization, and asked that institutions be allowed to carry goodwill on their books as an asset unless it falls in value. The board agreed in January, and with Wednesday's paper, indicated how it believes such reporting might work.

The proposal would require merged companies to allocate a pro rata share of goodwill to each of its "reporting" units, which the board defines 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."

For instance, a bank that purchased and merged with another institution might be required to allocate a specific portion of goodwill to the seller's mortgage lending department and to carry it as an asset on the books of the mortgage section of the post-merger institution.

The proposal would require companies to test the value of goodwill by determining the fair market value of each business unit as a stand-alone entity, and subtracting from that the value of its tangible assets. It lays out a number of events, such as a change in the competitive landscape or a loss of key personnel, that would require the company to re-test the goodwill to check for impairment.

In the event a loss of value is detected at any business unit, the firm would have to take a charge against earnings equal to the difference.

Bankers regret the loss of pooling-of-interest accounting, but have welcomed the impairment test as a constructive compromise, said Donna Fisher, director of tax and accounting for the American Bankers Association. Yet she and others said they are concerned that the proposal could be read as requiring banks to allocate and test for goodwill at business levels that do not currently report as individual entities.

"Based on our initial reading of the document, we are surprised and concerned at the level at which the FASB is requiring that we test goodwill for impairment," said Timothy L. Journy, executive vice president and controller of Compass Bank in Birmingham, Ala. "It appears they want us to test at levels lower than we had anticipated and lower than where we are required to report today."

An official at the FASB, however, said that she expected the bankers' worries would be alleviated, and that as she saw it, banks would only have to test those units they already account for as separate entities.

"The way it is drafted it is supposed to mirror the way the company manages itself," said Kim Petrone, project manager with the FASB. "We are trying to get to the level at which the information would be available, not trying to create a new level of reporting just for impairment testing."

The proposal is open for comment until March 16. The board has said that it expects to have a final rule in place by the end of June.


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