Tech Firms Tell Senators Planned Accounting Change Could Chill Mergers
Updated 2:35 PM ET March 2, 2000
WASHINGTON -(Dow Jones)- Dot-com executives and old-line manufacturers alike lashed out Thursday against a proposal to eliminate the pooling method of accounting for business combinations, warning lawmakers it could chill mergers and slow the U.S. economy.
At issue is the proposal by the Financial Accounting Standards Board to scrap the controversial pooling method in favor of purchase accounting.
The proposed change has alarmed fast-growing technology companies and the firms that finance them, prompting executives to air their complaints in a Senate Banking Committee hearing on mergers-and-acquisitions accounting.
"I believe that the elimination of pooling will discourage mergers and acquisitions, will have a negative impact on the U.S. economy and will create financial statements that are at best irrelevant and at worst, misleading," former Netscape Chief Executive Jim Barksdale, now a managing partner of the Barksdale Group, said in prepared testimony.
Netscape's own acquisition by America Online Inc. (AOL) "would not have occurred if pooling had not been an option," and its reported losses would have been 10 times higher in 1998, Barksdale added.
AOL's recently announced plan to acquire Time Warner Inc. (TWX) can't take advantage of pooling and will be accounted for under purchase accounting.
While pooling is rarely used abroad, both accounting methods have been accepted in the U.S. for decades. In pooling, the book values of merging companies are added together, without taking into account the price one paid to acquire the other. That means the true cost of the deal is never revealed to investors, so they can't track the investment over time, said FASB Chairman Edmund Jenkins. He said the advantage of the purchase method is that it shows transaction costs and gives investors valuable information.
Critics complain purchase accounting is flawed, and provides less useful information because it requires merging companies to write off intangible assets, such as goodwill, reducing reported earnings over a period of years. Under current rules, write-offs are amortized over 40 years. The FASB has proposed cutting that to 20 years.
"In reality, the FASB's proposed standard does not improve the accounting - it merely changes it," said Dennis Powell, corporate controller for Cisco Systems Inc. (CSCO).
Technology companies were slow to jump on the issue, but are taking notice now, since most are short on tangible assets such as cash, plants and equipment and long on intangibles, such as brand-name recognition, stellar talent and technological know-how.
Underscoring that, Powell said Cisco has acquired 50 companies since 1993, paying $19 billion, yet only $900 million of that, or 5%, was for hard assets, with the rest covering goodwill and other intangibles.
Not surprisingly, of the $200 billion of mergers in the medical-technology sector last year, a whopping 70% were accounted for as poolings, estimated Robert Ryan, chief financial officer at Minneapolis-based Medtronic Inc. (MDT).
John Doerr, a partner with Kleiner Perkins Caufield & Byers, a leading Silicon Valley venture-capital firm, acknowledged some problems with pooling but said purchase accounting isn't the answer. If the FASB insists on it, Doerr warned, it could crimp explosive growth in the "new economy."
Doerr and others urged the FASB to delay any changes pending the outcome of a review by Jeffrey Garten, dean of the Yale School of Management. At the request of Securities and Exchange Commission Chairman Arthur Levitt, Garten's group will consider changes, including in the accounting for intangible assets.
The FASB's view that intangible assets lose value over time deserves to be re-examined, according to Martin Regalia, chief economist for the U.S. Chamber of Commerce. Goodwill in the old economy may have been a deteriorating asset, but "goodwill in the new economy may not be," Regalia said.
"In the case of a successful merger, goodwill should actually increase," as the value of the merged companies exceeds the two former stand-alones, added Kimberly Pinter, finance and tax director for the National Association of Manufacturers.
Pinter said traditional manufacturers oppose elimination of pooling, but said some may have hesitated to criticize the FASB for fear that might invite scrutiny from the SEC.
Jenkins said the FASB has received hundreds of letters on the proposed elimination of pooling and is now evaluating them. The independent standard-setting organization has held four days of public hearings in San Francisco and New York, and will hold more such hearings before any final decision is made, Jenkins stressed. |
