SEC May Impose Limits
On Acquisition Write-Offs
By ELIZABETH MACDONALD
Staff Reporter of THE WALL STREET JOURNAL
The Securities and Exchange Commission said it may impose
new limits on the way companies book their acquisition
write-offs due to the poor quality of some recent corporate
earnings reports.
In particular, the SEC is worried that a rising tide of
companies are abusing acquisition charges for purchased
research and development, goodwill and restructuring costs.
Accounting critics say some acquiring companies are reporting
dubious write-offs for these costs to artificially "manage"
subsequent earnings.
"How auditors report these charges in
financial statements doesn't change
the value of these companies," said
Pat McConnell, accounting and tax
analyst at Bear, Stearns & Co. "But
the disclosure and transparency of
these charges should certainly be improved so investors and
analysts can properly assess the value of these companies."
Considering Options
Brian Lane, director of the SEC's division of corporation
finance, said the SEC first has to discuss these problems with
corporate and accounting executives. Once that is done, the
SEC will then consider "tightening the accounting rules or
auditing rules" for these charges or "we have our own rules
that we might change," moves that could take place next year,
he said. The SEC enforces accounting and auditing rules. It
has the legal authority to enact such rules on its own, but
rarely does so. "We are considering our regulatory options at
this point," Mr. Lane said.
Notably, a growing number of companies are writing off huge
chunks of their acquisition costs as purchased R&D. The
higher the value for these charges, the more acquirers can
avoid hits to future earnings from goodwill. When companies
purchase other firms, they must write off any resulting
goodwill, the premium paid over the fair-market value of an
acquired company's assets, for as long as 40 years, slicing into
earnings every year along the way.
A recent New York University study shows only three
companies wrote off part of their acquisitions as R&D during
the 1980s. But 389 have done so in the 1990s -- with a record
156 in 1996 alone.
SEC officials recently questioned R&D charges taken by
Envoy Corp., a Nashville, Tenn., medical-claims processor,
and America Online Inc. Both companies have said their
treatment of R&D write-offs meets generally accepted
accounting principles.
Rise in Restructuring Charges
In addition, the SEC is worried about the rise in reported
restructuring charges, Mr. Lane said. Such charges are usually
taken for things like layoffs or plant closings, and can
temporarily depress profits, but make earnings glow in
subsequent years. They are "often characterized as one-time
unusual events, but if they are one-time unusual items, then
why are they becoming more usual?" Mr. Lane asked.
The SEC's signal that it may tighten the rules covering these
write-offs comes in the wake of the disclosure last week that
the agency's Office of the Chief Accountant is meeting with
accounting and corporate executives to discuss the recent
wave of corporate accounting problems.
Over the past year or so, more than a dozen companies,
including Cendant Corp., Oxford Health Plans Inc., Sunbeam
Corp. and Waste Management Inc., have had accounting
problems blow up in their faces.
The SEC's heightened concern stems in part from its
perspective that auditors aren't doing enough to stop
companies from bending the accounting rules to manage their
earnings. Auditors increasingly are asking the SEC to bless
certain dubious accounting practices that their corporate
clients demand.
"We won't go away, we're here and we're vigilant," Mr. Lane
said. |
