M&A Roundup: Materiality Stance Is Welcomed

Merger and acquisition practitioners are hoping that a new accounting pronouncement by the Securities and Exchange Commission (SEC) will smoke out more and better information on target companies during the due diligence process. Issued in the form of a Staff Accounting Bulletin (SAB), the new communication clarifies the SEC’s thinking for declaring whether an accounting item is material, and must be publicly disclosed, or immaterial, and may be kept under wraps. The gist of the bulletin is that that accountants and companies making those decisions cannot cut the decision exclusively to the size of the item. Rather, the bulletin says, a qualitative approach is desirable because relatively small items could actually manifest serious problems. Traditionally, but unofficially, accountants have classed anything that impacted major financial measures by 10% or more as material. “Now it is hard to think that anything is immaterial,” said Robert Willens, vice president at Lehman Brothers. “The SEC is opting on the side of fuller rather than less disclosure.” Raymond G. Beier, partner at PricewaterhouseCoopers, said the bulletin was part of the SEC’s campaign against “managed earnings” to boost stock prices, but there may be some m&a benefit. “That is not clear except to produce financial statements that some will say are more reliable.” Laurence Goldfein of Richard P. Eisner thinks that the SEC is “on the right track” and is hoping that the materiality standards will serve up more good due diligence data. “They are refocusing on what should be the test of materiality,” he noted.