BRIDGE PRESS: FASB eliminates pooling method of accounting
By Luisa Beltran, Bridge News
New York--April 21--The Financial Accounting Standards Board said today it has decided to ban the popular pooling method of accounting, which has fueled an unprecedented wave of mergers and acquisitions.
FASB, a private standards body that creates accounting rules for U.S. companies, voted unanimously today to eliminate the accounting method. The change will affect all transactions initiated after FASB issues its final rule which is expected by the end of 2000.
The standards body had considered restricting the use of pooling to deals involving mergers of equals but chose to use only purchase accounting.
"We decided it wasn't worth trying to figure out which very few
combinations might fit into that pooling mode," said FASB project manager Kim Petrone.
FASB's ban on pooling will not affect combinations of companies under common control or not-for-profit organizations, said Petrone. The Board intends to issue a proposed rule late July on pooling.
Companies outside of the U.S. are constrained in their use of pooling. Companies here can use either the pooling method of accounting or the purchase method to book a deal. U.S. companies like to use pooling because it makes acquisitions look less painful to shareholders. Companies that use the method also don't have to record assets at their current market value and can take advantage of high stock prices. In purchase accounting, acquirers write-off the difference between the price paid and the fair value of the company--known as "goodwill"--for up to 40 years. By contrast, companies in a pooling-of-interests combine their assets and debts, as if they had always been one company.
Throughout the 1990s, pooling gained popularity in the U.S., with
nearly half of all multi-billion dollar deals announced last year using the method, reports Securities Data Corp. The number is even higher for deals involving technology, telecommunications and life sciences companies. In March, FASB chairman Ed Jenkins said a ban on pooling would eliminate the competitive advantage US companies now enjoy from being able to choose between two methods. "This will level the playing field more than it is now," he said.
In May, FASB will also revisit its decision on goodwill. The Norwalk, Conn.-based board had decided that good will should be written off over its "useful life," which is presumed to be 10 years or less, but can be up to 20 years.
In February, FASB received about 175 letters on pooling. Many of the comments, said Petrone, were negative on goodwill. As a result, FASB will consider again all aspects of goodwill, including making it a permanent or non-amortizing asset.
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