NEW YORK-The Financial Accounting Standards Board, Norwalk, Conn., expects by early next year to complete its project to eliminate the advantageous tax treatment of mergers as pooling of interests, rather than outright purchases.
By dollar volume of recent transactions, companies in the high-technology sector, including telecommunications carriers, have relied disproportionately on accounting for their merger and acquisition activities as pooling of interests. As a proportion of the total number of recent M&A deals, however, purchases comprise the majority.
The proposed elimination of this tax treatment has caused consternation among high technology industry representatives, who fear its absence would prove disadvantageous, particularly to small and medium-size companies.
At a recent New York Society of Security Analysts market outlook forum, moderator Vincent C. Catalano, president of iViewResearch.com, asked if the pending elimination of pooling of interests would change or diminish companies’ merger strategies.
“The market will have to decide if the disadvantage of the accounting change outweighs the advantages of acquisitions,” responded Liz Ann Sonders, managing director of Campbell, Cowperthwait & Co.
“In the tech sector, the Ciscos and Intels of the world have proven to be exceptional acquirers in order to reinvent themselves.”
Among FASB’s chief objections to pooling of interests is that this treatment gives an undeserved, artificial boost to the future earnings of companies combined this way. This hike is unrelated to real economic differences in their performance relative to other merged companies that accounted for their acquisition transactions as purchases. Consequently, the board is concerned investors are forced into apples-and-oranges comparisons among companies that account for their acquisitions in different ways.
The pooling-of-interests method records the value of a merger as the sum of the book value of the assets of the two companies in the combination. When a merger involves the exchange of buying and selling companies’ stocks, market prices of these securities determine the worth of the transaction.
“[This gives] no recognition at all to the price one company actually paid to acquire another,” FASB Chairman Edmund L. Jenkins said.
“So the true cost of the transaction is never revealed to investors, and they have no ability to track the company’s investment over time.”
In deciding to propose the abolition of the pooling method, FASB said it took another key factor into consideration: “Business combinations are acquisitions and should be accounted for as such, based on the value of what is given up in exchange, regardless of whether it is cash, other assets, debt or equity shares.”
In a merger treated for accounting purposes as a purchase, one company is identified as the buyer and records the enterprise being acquired at the cost it actually paid to acquire it. The excess of the purchase price over the fair market value for the acquired company’s net assets is known as goodwill, which is charged to the buying company’s earnings over time.
Once adopted, the FASB rule would govern accounting for business combinations initiated after publication of the final statement on pooling of interests.
“For public companies, the Securities and Exchange Commission enforces FASB rules. Private companies that want an auditor’s report that they are in compliance with GAAP (Generally Accepted Accounting Principles) must also follow FASB rules,” said Deborah Harrington, media relations manager for FASB.
