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Technology Stocks : Lucent Technologies (LU)
LU 2.410-0.8%12:22 PM EST
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To: GVTucker who wrote (14159)3/27/2000 1:47:00 PM
From: Chuzzlewit  Read Replies (2) of 21876
 
GVT,

An excellent point, that goes to the heart of some rather peculiar accounting rules surrounding acquisitions. Under current purchase accounting rules a substantial portion of the purchase cost is written off as in-process R&D provided that the R&D has no current market and is unlikely to result in a marketable product in the near future. But the only reason that companies like CSCO are acquisitive is to obtain the R&D of the acquired company. Why pay a premium if there is no value to the R&D?

But pooling of interest accounting is equally (and perhaps more flawed). Pooling of interest accounting does not recognize the cost to shareholders of the acquisition since the companies are treated as if they were always merged. That's why the financial reports are restated following a pooling merger. There is a move afoot to eliminate pooling of interest accounting because of this distortion.

IMO, this is not enough. We also need to have immediate write-offs for IPR&D discontinued. I propose that instead, such sums be included in goodwill and written off over a 3 - 5 year period.

The issue also speaks volumes about analysts who blithely accept earnings before "one-time" write-offs.

Thanks for a great post!

TTFN,
CTC
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