FASB to Buffer Impact of Ban on M&A Pooling

WASHINGTON — Bowing to industry pressure, accounting standards setters on Wednesday took steps to buffer companies’ earnings statements against a proposed ban on the pooling-of-interests method of accounting for mergers and acquisitions.

In a two-page news release, the Financial Accounting Standards Board announced that it had reached “a tentative decision” to modify a controversial September 1999 proposal that would bar the pooling method in favor of purchase accounting.

Under purchase accounting, the acquiring party in a merger would be required to subtract the book value of the acquired company from the actual purchase price — the difference is known as goodwill — and to reduce its earnings by that amount over a period of 20 years or less.

Companies involved in mergers generally prefer the pooling-of-interests method because it allows them to simply combine their balance sheets without reducing earnings.

The announced revision, while not restoring that option, would mitigate the purchase method’s impact on merged companies’ income statements. The companies would be allowed to carry goodwill on their books as an asset unless it becomes “impaired” — indicating a decline in value. Any impairment of goodwill would have to be charged against earnings.

H. Rodgin Cohen, chairman and senior partner of the law firm of Sullivan & Cromwell, said the revision “is a positive development, because the real issue has always been not so much pooling versus purchase, but what you do with goodwill and the impact that has on the income statement.”

The new proposal “is much more consistent with economic reality,” said Mr. Cohen, a veteran of many major bank mergers.

Banking industry representatives said they were cautiously optimistic about the proposal.

“This looks like good news,” said Donna Fisher, director of tax and accounting for the American Bankers Association. “Theoretically it is the right answer, and it looks like they are trying hard to make it practical. We hope that’s what happens when we see the details.”

Ms. Fisher said she was particularly concerned about how impairment will be measured. Small banks may find a highly complex testing system too onerous, she said.

Michael A. Ittner, vice president and treasurer of Central Trust Bank, a $1.16 billion-asset institution in Jefferson City, Mo., said his “initial reaction would be that this is a step in a positive direction, but we will want to see some of the nuances” in the proposal.

“Community banks obviously have less sophistication than the money-center banks, so the methods they would see as acceptable are a concern from a community bank’s standpoint,” Mr. Ittner said.

FASB chairman Edmund L. Jenkins said in a press statement that the decision was “directly responsive to the feedback we received on this issue from many companies, auditors, investors, and others.”

Field trials of impairment testing, combined with feedback from the industry, convinced the board to alter its plan, Mr. Jenkins said. The feedback “confirmed that such an approach would be an improvement over the originally proposed amortization approach, because it provides investors with greater transparency with respect to the economic value of goodwill and the amount and timing of its impact on companies’ earnings.”

The revised proposal would require companies to test for impairment of goodwill at the lowest business unit level, which means that goodwill could not be carried on the books as a lump sum, but would be allocated to units across the combined company.

The merged company would be required to periodically measure the value of any business unit to which goodwill has been allocated, and to compare it against the book value of that unit’s net assets.

The difference between the two — the current value of the goodwill — would be compared to goodwill allocated to the unit on the company’s books. If the current value of the goodwill is less than the amount on the books, the difference would be charged against the company’s earnings.

Officials at the standards board originally said they would make revised rules for merger accounting part of Generally Accepted Accounting Principles by yearend, but the board later pushed the target date back to March 2001.

In the statement released Wednesday the board warned that the final statement on the issue may be even farther away than that. If a revised proposal includes an impairment test, it may require another round of public comment, the board said.