NEW YORK-The Financial Accounting and Standards Board has eliminated the advantageous tax treatment called “pooling-of-interests” for most mergers and acquisitions initiated after June 30.
Many companies that have relied disproportionately on pooling-of-interest accounting treatment, including those in the high-technology sector, had lobbied hard to prevent the new rules from going into effect. Representatives of high-tech industries have expressed fear that the absence of pooling-of-interest would prove disadvantageous, especially to small and medium-size companies.
However, after at least 60 public meetings and additional hearings and on-site visits to some affected companies, the board voted unanimously June 29 to mandate that all business combinations be accounted for as purchases.
To implement its directive, FASB issued July 20 two related directives: “Statement No. 141, Business Combinations” and “Statement No. 142, Goodwill and Other Intangible Assets”.
“Statement 141 improves the transparency of the accounting and reporting for business combinations. … Statement 142 requires that goodwill no longer be amortized to earnings but instead be reviewed for impairment; this change provides investors with greater transparency regarding the value of goodwill and its impact on earnings,” the board said in issuing the two statements.
Impaired capital, also known as deficit net worth, is the excess of liabilities over assets and capital stock, possibly due to operating losses.
The pooling-of-interest 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 buying and selling of companies’ equity shares, market prices of those securities determine the transaction’s worth.
“This gives no recognition at all to the price one company actually paid to acquire another, 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,” said Edmund L. Jenkins, chairman of FASB.
In a merger treated for accounting purposes as a purchase, one company is identified as the buyer and records the cost it actually paid to buy the company it is acquiring. Goodwill is defined as the excess of the purchase price over the fair market value for the net assets of the acquired company.
Under old FASB rules, now superseded by Statement No. 142, the acquirer amortized the cost of that goodwill against its earnings over a maximum period of 40 years. FASB had considered reducing the maximum goodwill amortization period to 20 years, but instead it opted to eliminate the practice as of January 1 for most companies.
Banks and some other financial institutions will have until next year to begin complying with the elimination of pooling-of-interest treatment. All others must comply for transactions initiated after June 30.
FASB, headquartered in Norwalk, Conn., has served since 1973 as the standards-setting organization for financial accounting and reporting. The standards it sets govern the preparation of financial reports and have official recognition as to their authority from the Securities and Exchange Commission and the American Institute of Certified Public Accountants.
