The merger and acquisition spree that has gripped key sectors of the computer industry, notably data communications equipment and software could get even more frenetic over the next year or so as companies race to beat a possible deadline set by the US Financial Accounting Standards Board, which wants to bring US accounting standards closer to those in much of the rest of the world. At issue is merger accounting, where companies acquiring others are home free with regard to writing off goodwill – difference between net asset value and the (almost always) much higher price paid for the company, usually in shares, if they treat the deal as a pooling of interests – in which case you get absurd talk of IBM Corp, $70bn annual sales, merging with Lotus Development Corp, $1bn annual sales. In most other countries, acquirors have to write off goodwill, and according to the Wall Street Journal, the Accounting Board is considering changes that would either restrict or end poolings of interests.
Doesn’t seem so bad
The reason for possible turmoil is that any changes would not come in before 1999. But some accounting experts reckon ending or limiting the pooling rule could have a chilling effect on future merger and acquisition activity in the US. That seems highly unlikely, and if it caused companies to spend rather longer over their due diligence before deciding whether to buy or not, that would be no bad thing. Deborah Harrington, speaking for the Board, says the decision to look at these rules is a signal that changes are forthcoming that may curtail the use of pooling accounting in the US. She says the board wants to bring US accounting rules in line with international practices, which rarely include pooling. Eliminating pooling would mean that more companies would have to use purchase accounting, where the acquiring company records the price of the acquisition, rather than pooling the two companies’ assets, and then has to write off the goodwill against earnings for as long as 40 years, and the charges are not tax-deductible, which is why people talk about a tax-efficient pooling of interests. But 40 years doesn’t seem so bad – after five, the number must reduce to a pinprick compared with total profits, and most other countries have rather shorter amortization periods. Why should we use a 40-year schedule if many other countries use five? asks an Accounting Board technical analyst. The good news here is that the Board is also considering a rule that would allow companies to get away with not writing off goodwill if their acquisitions continue to be worth the premiums paid – but that one sounds like a complete can of worms because however disastrous the acquisition, companies will try to justify the price paid to avoid having to write off goodwill. The idea of changing the rules is to make accounts easier to read: in a pooling, no one knows what exactly the buyer paid for the company by merely reading the financial statements; investors typically must hunt in the footnotes. How can analysts or shareholders properly compare numbers when one merger has recorded the new assets at book value, and the other has recorded them at purchase price and must charge the difference to earnings? demands Ms Harrington.
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