The FASB Revises Its Pooling Ban To Eliminate Pain for Buyers : The Accounting Board Proposes Removal Of Goodwill Write-Off Requirements

Did the Financial Accounting Standards Board blink? The accounting profession’s rulemaking body seems determined to follow through on a project it launched some two years ago by eliminating pooling-of-interest treatment in accounting for mergers and acquisitions. But in the latest of several variations, the proposal to kill pooling and retain purchase accounting as the uniform treatment could wind up as painless for buyers who pay a lot more than the target’s asset value. While they still would have to book acquisition goodwill to reflect the excess, they would not be required to write it off, therefore avoiding big, sequential hits on earnings. Roundly attacked by investment bankers, acquirers, and members of Congress after it proposed a pooling ban, the FASB appeared to make a final concession in late December when it proposed that goodwill write-downs for old deals will be eligible retroactively for the same treatment it earlier proposed for transactions still to be done. “This has to be a huge positive for m&a. There’s nothing negative in applying the new standards to older deals,” says Robert Willens, managing director and tax expert at Lehman Brothers. He added that there is no limit to how far back the Board’s proposed regulation would apply. The amendment on back deals followed the FASB’s December 6 statement that it still favored elimination of pooling but removed the requirement for large periodic earnings write-downs of goodwill. It was the write-down requirement that led many acquisition-minded companies – especially in the technology sector, where hefty purchase prices frequently far exceed target asset values – to object to the elimination of pooling. Many industry experts saw the board’s decision to apply its new proposals to older deals as a logical progression from the December 6 position. “The retroactivity question was a big missing piece of the board’s policy. It looks like all the important decisions have been made,” Willens says. The board will put out an exposure draft later in the first quarter and interested parties will have 30 days to comment. While the compromise on new and old deals is not yet definite, the FASB said that it plans to have the new rules in place some time in the second quarter. Acquiring companies are not off the hook Even though criticism of the Board’s kinder, gentler method of eliminating pooling has been limited primarily to academics, financial experts cautioned that if the proposed rules are enacted, there is still enough complexity to warrant close study by acquiring companies. “You will see some unexpected and undesirable effects of deals done under the new rules because all the excess value beyond book value isn’t goodwill,” says George Kelts, a managing partner in Deloitte & Touche’s m&a services group in San Francisco. He added that there will be differing interpretations of questions like which intangible assets can be lumped into goodwill and which are excluded. Another financial expert, Mark McDade, partner at PricewaterhouseCoopers, says that under the new rules, as companies drill into the impairment test, they may run into endless difficulties. In one scenario, a company might have to revalue an asset it acquired if the Securities and Exchange Commission (SEC) doesn’t agree with the benchmark it used. McDade also raised the issue that the SEC, a key proponent of scrapping pooling, is the ultimate arbiter of how companies are complying with FASB rules. If commission staffers take issue with a company’s definition of impairment, they could ask for a reevaluation by the company. On the other hand, Kelts noted that if the target company is successful, the acquirer theoretically may never have write-off of goodwill. Another potentially confusing area Kelts pointed to is how financial analysts will react to a write-down that is the result of the application of an impairment test. “We don’t know how analysts will react to a lump-sum impairment charge,” he says. However, Willens says that analyst views shouldn’t be a major concern. “People will see that it’s a one-time, non-recurring charge.” But he added that such write-downs could be used as ammunition to attack the company’s management, since the need for a write-down could mean that the company overpaid for the acquisition. Good riddance to annoying rules Many authorities say that if the FASB proposal makes the accounting convention in its present format, pooling may not be missed at all. For example, two of the most controversial current rules to obtain pooling bar postacquisition asset dispositions for two years after the deal closes and limit stock repurchases by acquiring companies. If pooling goes, acquirers will be able to sell off unwanted assets, and recover some of the purchase prices, as soon as they wish and execute unlimited stock buybacks as share support mechanisms.