OT ++ Regulators to Issue Decision On M&A Accounting Method
By ELIZABETH MACDONALD
Staff Reporter of THE WALL STREET JOURNAL
In an issue closely watched on Wall Street, U.S. accounting rule makers are expected to decide Wednesday to eliminate an accounting method that has helped fuel the recent surge in mergers and acquisitions.
But to make its changes palatable to companies, the Financial Accounting Standards Board may retreat from an earlier plan that would have created bigger annual merger write-offs than those now common under an alternative accounting method. That move would have sharply hammered companies' earnings in the years immediately after a deal.
Following Wednesday's decision, the FASB is expected to come out with a proposal covering the changes in July; if the board adopts these changes, they could take effect Jan. 1, 2001. To beat the deadline for the rule changes, M&A activity is expected to increase before then.
Specifically, the FASB is expected to decide to eliminate so-called pooling of interests, a popular bookkeeping method favored by acquisitive banking, high-technology and pharmaceuticals companies. Poolings are all-stock deals, in which merging companies combine their balance sheets and thus avoid future profit hits from "goodwill." Goodwill is the premium paid over acquired net assets and must be written off over time. Companies favor pooling because, in addition to avoiding goodwill, it lets them use their ever-soaring shares to complete deals.
The board is considering restricting poolings to deals that are truly mergers of equals -- for example, in cases in which a merged company's top management is split 50-50 between the two combining companies. But doing so would create "just as many complexities as we have today with the pooling rules," FASB Chairman Edmund L. Jenkins said. Instead, "the staff recommendation is we do away with pooling of interests entirely."
As a result, companies would be forced to book their acquisitions under the alternative method, so-called purchase accounting. Purchase accounting creates goodwill charges that can sting a combination's annual profits for decades.
But in a possible concession, the FASB is considering scrapping an earlier plan to cut the goodwill write-off period to 10 years (or possibly 20 years if companies could make the case for the longer period) from the current 40-year term. "We want to be careful, we don't want to rush to judgment here," Mr. Jenkins said.
The FASB instead may either preserve the current 40-year write-off period, or create an immediate, one-time goodwill charge. The latter would be the best compromise, said Robert Willens, a managing director and accounting expert at Lehman Brothers Inc.
Corporate executives and investment bankers, who have made a lot of money from pooling deals, have written more than 100 letters to the FASB, many of which oppose the death of pooling. But it is unlikely the board will back down, FASB officials say.
It is easy to see why companies favor pooling. Consider B.F. Goodrich Co.'s pending $1.22 billion pooling with Coltec Industries Inc. (which includes the assumption of about $800 million in debt). If the companies had to book the deal under purchase-accounting rules, a 20-year amortization period would create $75 million in annual goodwill charges, lowering the company's earnings by about 67 cents a share, Mr. Willens said.
For years, the FASB has wanted to kill pooling, arguing the two merger methods unfairly create different financial results among acquisitive companies. Pooling lets companies hide possible overpayments for their deals. The alternative accounting method is also getting a push from the proliferation of cross-border deals; most foreign companies use purchase accounting. "We want to move closer to that one method," Mr. Jenkins said.
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Let's hope for some positive results with the stock price this Q. Small cap's are definitely getting more of the spotlight. Not sure if lingering WCW license issue will continue as a black cloud over the bright future. Thanks for the "numbers" previews.
Jim
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