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In connection with its continuing redeliberations of its September 1999 proposed Statement on Business Combinations and Intangible Assets, the Financial Accounting Standards Board has reaffirmed in an announcement released on January 24, 2001 that it plans to proceed forward with its proposal to eliminate the pooling-of-interests method of accounting for business combinations. The FASB also reaffirmed its tentative agreement first announced in December 2000 to apply a non-amortization approach to goodwill generated in purchase acquisition transactions. Under the proposed non-amortization approach, the goodwill generated in a purchase acquisition transaction would not be amortized to earnings as is currently required under existing accounting standards. Rather, goodwill would be recorded as a permanent asset and would be reviewed for impairment and expensed against earnings only in the periods in which its recorded value exceeded its fair market value. The non-amortization approach would apply only to goodwill and various other asset categories would remain subject to potential write-ups and post-acquisition amortization/depreciation in connection with a purchase acquisition transaction. The FASB’s decision on goodwill amortization is in direct response to the significant input which FASB received from the investment and high tech communities and others concerning its original proposal, as well as the results of recent company field visits which indicated that an impairment approach could be developed that would be operational. Under the new approach, goodwill would be reviewed for impairment at the lowest financial reporting unit or units that include the acquired business. The acquirer would be required to determine the value of the reporting unit and the value of the recognized net assets excluding goodwill of the unit. The difference between those amounts (namely, the implied value of the goodwill) would then be compared to the carrying amount of the goodwill, and if the carrying amount of the goodwill was greater than its fair market value an impairment loss would be recorded in the company’s income statement. Impairment reviews would be performed initially based upon the significance of the level of goodwill to any particular reporting unit. Subsequent reviews would only be required “upon the occurrence of events indicating that goodwill of the reporting unit might be impaired.” Under the new proposal, goodwill generated in transactions that were consummated prior to the adoption of the new standards will be treated the same way as newly generated goodwill. Accordingly, when the new rules are adopted, all amortization of goodwill would cease and all goodwill, whether resulting from past or future transactions, would be accounted for under an impairment approach. The Board plans to issue its tentative decisions on the accounting for goodwill for a 30-day public comment period in mid-February. The Board has indicated that it expects to issue a Final Statement that will incorporate its decisions on the pooling method and the accounting for goodwill and other purchased intangible assets in late June 2001. The pooling method of accounting will still be available for transactions initiated prior to the issuance of the final Statement. With respect to the treatment of intangible assets other than goodwill, the Board has issued the following clarifications. Acquired intangible assets (other than goodwill) would continue to be subject to amortization over their useful economic life and reviewed for impairment in accordance with FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The Board, however, has decided to eliminate the presumption proposed in the initial Exposure Draft that such acquired intangible assets have a useful economic life of 20 years or less. The Board has also indicated that an acquired intangible asset (other than goodwill) with “an indefinite useful economic life” should not be amortized until its life is determined to be finite (and instead should be carried at the lower of its carrying amount or fair value) and thus excluded from the scope of Statement 121. Clearly, there will be a lot of attention in this area as to which intangible assets are deemed to be recognizable separately from goodwill and which of these assets are deemed to have a finite versus indefinite useful economic life. In guiding whether an intangible asset should be recognized separately from goodwill, the following criteria will be considered: (1) is control over the future economic benefits of the asset obtained through contractual or other legal rights (regardless whether those rights are transferable); or (2) is the asset capable of being separated or divided and sold, transferred, rented, or exchanged (regardless of whether there is an intent to do so or whether a market exists for that asset). The new proposed rules appear on balance to be a big positive to most active acquirers, and companies with large levels of historical goodwill on their books would see significant increases in GAAP earnings once the rules go into effect. However, important questions still remain. The FASB has yet to clarify precisely what types of changed circumstances or events should lead to an impairment analysis. For example, it is unclear whether significant changes in market values (and associated acquisition premiums) for businesses in a given industry would be enough absent a unique problem associated with an acquired business to prompt such an analysis. It is also unclear how successful acquirers in different businesses will be in avoiding significant write-ups in asset categories other than goodwill that will remain subject to ongoing amortization and depreciation charges. As potential acquirers and targets begin to assess their strategic options in 2001, the new FASB accounting proposals will be just one of many factors that they must consider. In a time of significant restructuring and repositioning in many industries, the new proposed rules, if ultimately adopted along the lines currently being outlined by the FASB, should be useful in facilitating flexible transaction structures. Craig M. Wasserman is a partner at New York’s Wachtell, Lipton, Rosen & Katz.

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