The Justa and Lars Honors Bob Brinker Investment Club Thread Message Board

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Pastimes : The Justa and Lars Honors Bob Brinker Investment Club Thread

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Dec 10 4:00 PM EST

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To: Justa Werkenstiff who wrote (1316)	7/24/2001 5:44:55 AM
From: Boca_PETE	Read Replies (2) of 10065

Justa: New Accounting Rules are effective July 1, 2001 for Accounting for Business Combinations. They are summarized at the FASB website (see below link): accounting.rutgers.edu How do you see these rules impacting tech growth and the U.S. economy on a go-forward basis? To Briefly Summarize: * Starting July 1, 2001, all Mergers must be accounted for as a PURCHASE which generates GOODWILL (No more Pooling-of-Interests Accounting where book values of the merged companies are just added and no goodwill is generated). (CISCO is not going to like this). With a PURCHASE, the investment in the purchased company is reflected on the acquiring company's books at the value of the acquiring company's shares given to the acquire company. THE EXCESS of that value given over the book value of the company acquired is reflected as GOODWILL on the acquiring company's BALANCE SHEET. * All periodic AMORTIZATION of existing goodwill TO CEASE effective January 1, 2002. The former rule required amortization of Goodwill over 40 years. - INSTEAD of periodic amortization, GOODWILL must be TESTED at least ANNUALLY for IMPAIRMENT on a business unit-by-unit basis . - If the TEST indicates that the current "FAIR VALUE" of the goodwill is lower than its reported amount, the company must write goodwill down to the estimated "fair value" amount in period of the test. "FAIR VALUE" is what a willing independent buyer would pay for the business. It is determined by appraisal under various approaches given various circumstances. Although Goodwill amortization against future operating earnings is about to cease, always placing it on the balance sheet will result in a lower return on assets than would have resulted from the old rule for "pooling". GO FORWARD, it will be interesting to see if the prohibition against "Pooling-of-Interests" in accounting in stock-for-stock mergers inhibits future acquisitions - especially in the high tech area (ie. CISCO) which had been taking advantage of that accounting in recent years. If it does, it will be interesting to see what effect such inhibition will have on the U.S. economy. BTW, The USA is one of the last countries to ban "pooling-of-interest" accounting for mergers. P

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