Pooling of Interest Ban On M&A Postponed by the FASB: Accounting Rule Makers Delay Controversial Action as Opponents Raise a Storm of Protest

Serious doubts arose in October over whether a proposed ban on pooling-of-interest accounting for mergers and acquisitions will go through in its present form – or at all. Once set to take effect on a virtually drop-dead date of January 1, 2001, the ban was postponed by the Financial Accounting Standards Board (FASB) until, at minimum, sometime later in the new year. Although the board said that it still had a lot of work to do in framing the rule and tackling related issues, the reprieve was granted amid an increasingly vociferous attack on the pooling bar by influential members of Congress and industry groups. “I’d rate it a 50-50 chance that it won’t get eliminated after all,” said Robert Willens, managing director and tax expert at Lehman Brothers. With pooling treatment, which is used only in stock deals, there are fewer post-deal hits on earnings because there is no recording or writing off of acquisition goodwill as a result of a merger. The other treatment of mergers, purchase accounting, requires companies to accumulate acquisition goodwill – usually the difference between a purchase price and the fair market value of a target’s assets – and write it off against earnings over a period of years. The board voted in September to set back the effective date of the ban to the end of the first quarter of 2001, claiming that its work on the issue had not been finished. In an October 4 letter to members of Congress, FASB Chairman Edmund L. Jenkins indicated that deliberations might take longer than that and that the board also was considering how to set rules for the ways in which companies would be amortizing acquisition goodwill. Jenkins’ letter followed a Congressional uproar in October even after the FASB had decided on the postponement. It took two forms. A bipartisan group of 13 senators, including Democratic vice presidential candidate Joseph Lieberman, asked the board to delay the ban until after Congress reconvenes next year. Their letter said that the ban “will make m&a very difficult for high-technology companies.” Meanwhile, California Reps. Christopher Cox, a Republican, and Calvin Dooley, a Democrat, introduced a bill to halt a ban on pooling for a year. FASB project director Kim Petrone said that the board has gotten a lot of requests that it postpone implementation for three to six months after it issues its final decision, and it may comply with these requests. However, Jenkins, even while saying that the FASB would need more time to complete its work, unleashed an attack on the Cox-Dooley bill. “The potential legislation must be seen for what it is, legislative interference with the FASB’s ability to do its job.” Lawrence J. White, an economics professor at the Stern School of Business at New York University, said, “Congress must have better things to do than to interfere with the FASB.” He also said that he favored purchase accounting treatment because “it brings the balance sheet post-merger up to something closer to reflecting what the company is worth, while pooling allows the undervaluing of assets to persist.” FASB deliberations on how goodwill should be accounted for have been proceeding on a parallel track with the related issue of a ban on pooling. Falcone said that the board is considering methods to fix the way purchase accounting measures goodwill to address some concerns of supporters of pooling. By far the most vehement supporters of pooling have been high-tech executives, with industry bigwigs such as venture capitalist John Doerr of Kleiner, Perkins, Caulfield & Byers and former Netscape chairman James Barkdale weighing in on behalf of pooling. The National Association of Venture Capital has also issued a statement in support of pooling. Willens said that he saw a precedent in the high-tech industry’s lobbying for the treatment of options about five years ago. At the time, the FASB was on the verge of requiring companies to write off the value of the options as a charge against earnings, that is, to put it on the books and amortize it. In the face of opposition from Silicon Valley, the FASB downgraded its proposal into a requirement that rather than expensing options, companies only had to disclose them in a footnote showing what earnings would be had they put the options on their books. Willens also said that outside of the high-tech sector, the growing acceptance of using cash earnings is gaining ground. “Companies are coming around to the belief that if people are going to look at earnings, we don’t need pooling anyway.”