this from today's sf chronicle...
" Tech Chiefs Protest Proposed
Merger Rules
New accounting plan could end
goodwill tax benefit
Tom Abate, Chronicle Staff Writer
Friday, February 4, 2000
Silicon Valley big shots faced the crowned heads of
accounting at a public hearing in San Francisco
yesterday, hoping to preserve a rule that has made it
easy for them to grow through acquisitions.
The Financial Accounting Standards Board, a
seven-member private body that governs the
profession, wants to eliminate an accounting
practice called ``pooling of interests' that lets
companies make acquisitions without taking
write-offs that would hurt their bottom line.
Silicon Valley executives, led by venture capitalist
John Doerr and former Netscape CEO Jim Clark,
said FASB would be foolish to kill the rule.
``This is a direct frontal assault on the New
Economy,' said Doerr, arguing that an end to
pooling would slow mergers, discourage venture
capital investment and hurt Silicon Valley
entrepreneurs who have become ``the envy of the
world.'
FASB has said it might eliminate pooling of interests
accounting in 2001, because it conceals the true
costs of mergers and makes it difficult for investors
to evaluate deals.
FASB wants all mergers to be accounted for under
the older ``purchase method' of accounting. Here's
the difference:
Suppose Company A spends $100 million to take
over Company B, whose hard assets -- such as
land, real estate and equipment -- have a book
value of $60 million.
Under purchase accounting, the part of the
purchase price that exceeds book value -- $40
million in this case -- is considered goodwill, and
must be written off over time, decreasing the
company's earnings.
In a pooling-of-interest mergers, the company is not
required to write off any goodwill. The two
companies simply combine their expenses and
revenues and go forward, with no impact on the
bottom line.
With certain limitations, companies can decide
which type of accounting treatment they want to
use.
Purchase accounting is tough on high- tech
companies, which typically have relatively few hard
assets. Their value is often tied up in patents and
other intellectual property, which would be
considered goodwill that must be written off under
purchase accounting.
Barksdale, who sold Netscape to America Online
for $10 billion in a pooling-of-interests deal, said
that if AOL had had to write off the huge goodwill
involved, it would have depressed AOL's earnings
by so much, for so long, the deal would never have
happened.
``Why change this (rule) when it's workin' real
well?' Barksdale asked.
FASB Vice Chairman James Leisenring retorted,
``I don't think it's working at all.'
FASB contends that because they can avoid writing
off goodwill under the pooling method, high-tech
firms have been able to pump up the price of
acquisitions, especially those done with stock.
This has made tech pooling deals seem hotter than
mergers involving purchase accounting, said FASB
staffer Todd Johnson.
``Investors aren't able to make accurate
comparisons between companies in the high-tech
versus the smokestack or the brick-and-mortar
world, so capital may not be going where it should,'
Johnson said.
Dennis Powell, corporate controller for Cisco
Systems, which has made dozens of pooling
acquisitions in the last three years, said FASB is
trying to impose asset-based accounting from the
industrial era on companies that don't fit that mold.
``We're investing in the know-how, the people and
other things that have no easy book value,' he said.
This isn't the first time FASB has clashed with
Silicon Valley. In the early 1990s, when FASB
proposed new accounting rules that would have
made companies write off the cost of stock options
given to employees, Silicon Valley companies and
workers held sidewalk protests that forced the
accountants to back off.
Meeting with reporters outside yesterday's hearing,
Doerr said such street tactics might be revisited if
FASB doesn't retreat on pooling.
FASB will hold a similar public hearing next week in
New York and decide the issue by the end of the
year. Though FASB is a private body, its standards
are accepted by the Securities and Exchange
Commission and have something approaching the
force of law on U.S. firms." |
