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Now that the Financial Accounting Standards Board has persuaded the business world to accept its new merger rules, it may have a fresh debate on its hands in 2001: When does M&A-induced goodwill get impaired? In November, the Norwalk, Conn.-based group that sets the nation’s accounting standards embraced a new method for dealing with goodwill — the asset created when a buyer pays more for a company than its book value. The change should help the FASB eliminate pooling-of-interest accounting for mergers, something the standard-setter has been trying to do for decades. And even technology companies and financial institutions, among the FASB’s harshest critics on the pooling-elimination effort, have praised the new goodwill rules. Problem is, FASB’s new approach gives companies wide latitude to decide when and how to write goodwill off their books. “This has the potential of being a real nightmare,” said Paul R. Brown, chair of the accounting department at New York University’s Stern School of Business. The new goodwill rules will soften the blow of purchase accounting, the method the FASB wants used in all mergers. Purchase accounting’s main drawback has been that it forces companies to recognize goodwill after practically any merger. This goodwill then must be amortized over a period of years, just as any other asset. Big deals can create tens of billions of dollars worth of goodwill, and in some cases, the amortization charges can subsequently cut buyers’ reported earnings by several billion dollars. The FASB’s new goodwill rules would eliminate these amortization charges — even for deals that closed years ago. Instead, companies must check their goodwill regularly to see if it has dropped in value, a process that accountants call “impairment testing.” These tests are not entirely new. The FASB proposed them in another set of accounting rules nearly six years ago. But impairment testing has never before taken the place of regular amortization charges, and no one has ever developed a set of rules for figuring out if an asset is impaired, accounting experts said. As a result, the fear now is that companies will use the uncertainty to their advantage. “The motivation will exist to get what’s perceived to be a more favorable [accounting] treatment,” said Jane Adams, an accounting analyst with Credit Suisse First Boston. “There is a lack of clear guidance.” Some accounting analysts expect the situation to parallel the recent showdown over in-process research-and-development bookkeeping. In that case, merger accounting rules let buyers write off the full value of their target’s research projects, something acquirers like because Wall Street regularly ignores big, one-time charges, especially soon after a major acquisition. Two years ago, however, the in-process R&D write-off got out of hand, leading to a crackdown by the Securities and Exchange Commission. WorldCom Inc. sparked the controversy when it tried to write off $7 billion of its $37 billion acquisition of MCI Corp. in late 1998. In that year alone, companies wrote off $20.8 billion worth of in-process R&D. The SEC isn’t waiting this time. In a November letter, SEC Chief Accountant Lynn Turner asked the American Institute of Certified Public Accountants to develop some uniform valuation rules. Turner did not mention goodwill write-offs specifically, but the AICPA will consider addressing them anyway, said Dan Noll, the staffer in charge of the project. Turner was traveling last week and could not be reached for comment. The FASB, meanwhile, won’t be part of the impairment battle. The group plans to open its new goodwill standard to public comment during the month of February, and it hopes to issue a final rule in June, at the latest. That standard probably won’t include specific rules on valuing goodwill. The rule-making body will then leave it up to others to debate the vagaries and potential abuses of impairment testing, and it clearly knows it’s leaving the book opened. Said Kim Petrone, the FASB project manager responsible for the new rules: “There is some amount of judgment involved.” Copyright (c)2000 TDD, LLC. All rights reserved.

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