The accounting establishment is contemplating a move that could seriously curtail bank merger activity over time.
The Financial Accounting Standards Board is taking comments through Feb. 15 on a proposal to abolish the pooling form of accounting that is far and away the most popular way to account for banking mergers.
"This would be a major change," said Robert L. Tortoriello, a partner at the New York law firm of Cleary, Gottlieb, Steen & Hamilton.
If it looks like the rule might be adopted within two or three years, which would be fast in the accounting world, "it could drastically accelerate the pace of deals that bankers already have in mind," Mr. Tortoriello said.
A new accounting standard "would have a significant impact on the pricing of deals and ultimately would impact deal volume itself," said H. Rodgin Cohen, a partner at the New York law firm of Sullivan & Cromwell.
It is widely believed that the multibillion-dollar megamergers of the recent past simply could not have been accomplished without the ability to do poolings of interest.
In the past three years nearly every major bank deal has been accounted for as a pooling, among them NationsBank Corp.'s merger with BankAmerica Corp., and First Union Corp.'s acquisition of CoreStates Financial Corp.
In a pooling, the assets of the two companies are combined and subsequently reported as if the buyer and seller had previously been one. The values of each company's assets are not repriced.
Under the alternative method for acquisitions, purchase accounting, the price paid above the acquired company's net worth is accounted for as goodwill and must be amortized, or subtracted from the combined company's reported earnings, over as long as 40 years.
Substantial amounts of goodwill can lead to dramatic changes in earnings statements.
For example, Wells Fargo & Co.'s earnings for 1997 were 29% lower than its "cash earnings" because of goodwill charges stemming from its 1996 acquisition of First Interstate Bancorp.
Investors have been cool to banks' cluttering their balance sheets with huge amounts of goodwill and thereby depressing earnings. Since 1995, when the prices of mergers soared, deal-minded bankers have primarily sought pooling treatment.
In 1998, the total value of bank mergers accounted for as poolings was $257.6 billion, according to Sheshunoff Information Services. Purchase deals amounted to only $19.6 billion.
Michael P. Pinto, chief financial officer at M&T Bank Corp. in Buffalo, said pooling harms shareholders because it forces acquiring companies to finance mergers entirely with equity, the most expensive form of capital.
And the accounting profession's standard-setters contend the pooling approach is inferior because it disguises costs incurred from buying others.
"From the point of view of an income statement, poolings are better," said Financial Accounting Standards Board project manager Kim Petrone. "But as to providing information on what the company is doing, some feel purchase is preferable."
Accountants have been contemplating a standard establishing a single method of merger accounting for several years.
Last month, just weeks after Deutsche Bank agreed to buy Bankers Trust Corp., Norwalk, Conn.-based FASB and accounting bodies from Britain, Canada, Australia, and New Zealand unveiled their position that purchase should be the only internationally accepted method of merger accounting.
"Promoting international comparability is part of the board's mission and is a specific goal in the board's strategic plan," said FASB chairman Edmund L. Jenkins.
The FASB move accompanies efforts by the Securities and Exchange Commission to limit poolings.
Since Wells Fargo announced its merger with First Interstate in late 1995, the SEC has made poolings of interests more difficult by limiting companies' ability to repurchase their stock and otherwise manage their capital.
That was an example of attacking merger accounting policies on the fringes, said Mr. Tortoriello of Cleary Gottlieb. "Now they're going for the heart."
As a result, dealmakers say, a buying frenzy could develop in anticipation of an end to the pooling option.
M&T's Mr. Pinto said abolition would force a reassessment of how much acquiring companies have been willing to shell out.
"It will likely take out the pricier deals," the M&T Bank executive said. "People will have to think about what they are paying."