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Many accounting experts are concerned over details of proposed merger accounting rules, with some worrying the new standards will be more open to abuse than the rules they replace. The Financial Accounting Standards Board, the Norwalk, Conn., group that writes the nation’s accounting rules, is considering dramatic changes to the way mergers are booked. The FASB plans to eliminate the pooling-of-interest method — a commonly used approach for recording stock deals — and to rework the rules for recording the premium paid in most takeovers. The FASB plans to vote on the new rules by the end of June, with the regs likely to go into effect later this year. Most experts support eliminating the pooling method, which accountants believe disguises mergers’ true cost. But in recent comment letters to the FASB and in interviews, some industry participants expressed fears that the new rules for booking premiums, or “goodwill,” are overly complicated, leave too much to judgment and may encourage manipulation. “They are ripe for abuse,” said Paul Munter, chairman of the accounting department at the University of Miami School of Business (The FASB is slated Wednesday to begin a second round of deliberations on the new rules.) The rules would treat goodwill unlike almost any other asset. Until now, goodwill has been amortized — that is, written off annually — from companies’ books, just like any other asset. These amortization charges are considered expenses, and like any expense, they count against companies’ reported earnings. The proposed FASB regulations would do away with goodwill amortization charges. Instead, companies would periodically test their goodwill to see if its value has declined, using complicated models that project future revenues. The upshot is that companies will book goodwill charges less frequently — say, once every few years — but in big lump sums. Some accounting experts worry that these changes will lead to the same sort of practices that fed two recent accounting controversies. In 1998, the Securities and Exchange Commission began investigating instances of companies’ inflating restructuring charges, such as the cost to lay off workers. Then a year later, the SEC began cracking down on abuses of a merger rule that lets companies immediately write off their targets’ in-process research and development. The advantage of big one-time write-offs is investors and analysts usually ignore them. Because they are non-recurring, the assumption is they have little to do with a company’s continuing operations. That is not necessarily the case when the write-offs relate to a major acquisition. The FASB has already taken steps to guard against accounting abuses. It wants companies to determine the value of their intangible assets soon after the new rules go into place and immediately after any deal. This is supposed to keep companies from manipulating the timing and size of goodwill write-offs, because they would have to use the same assumptions in the future. Accounting regulators also have asked companies to separate a true purchase premium from other intangible assets, such as trademarks, secret formulas and technical expertise. This will reduce the amount of goodwill on companies’ books, which the FASB believes would cut the risk of heavy goodwill charges. But some see a flaw in that approach. The FASB has not changed the rules for writing off intangibles, so anything that companies break out of goodwill will have to be amortized and charged to earnings. In fact, the new rules actually give companies an incentive to inflate the value of goodwill, accounting analyst Jack Ciesielski said in a comment letter to the FASB. “The goodwill provisions work only when other intangibles are properly stated,” he said. Such concerns have prompted one major group, the American Institute of Certified Public Accountants’ accounting standards committee, to come out in favor of the old rules. No matter what the FASB does, goodwill will most likely reflect the value of intangibles, the group said in a comment letter. And because the value of those intangibles erodes steadily over time, they should be amortized. “We consider the result of using a systematic method of amortization to be an appropriate balance between conceptual soundness and operationality at an acceptable cost,” the group said. The FASB will discuss clarifying the rules on intangibles at Wednesday’s board meeting. Others, including accountants at several large companies, worry that the FASB is being too diligent in defending against potential abuse. Their complaints center on the long list of events the FASB says could force a goodwill write-off. These include everything from a rapid drop in stock price to a competitor’s coming out with a new product line. Meanwhile, the FASB also wants companies to allocate goodwill to the smallest reporting unit possible — a level of accounting far below the one used in most standards. The change is enormously significant. In the case of a retail chain, for example, the new rules would force retailers to figure out how much goodwill each of its stores generate; under other standards, goodwill would be assigned to an entire retail division, say experts. “There’s a general concern that the triggering mechanism combined with the reporting-unit requirement would have firms performing reviews almost quarterly,” said Dennis Monson, a senior partner at KPMG International. The FASB will consider clarifying those rules as well Wednesday. But some supporters of the proposal say it would be better to leave the task of resolving ambiguous rules to the people who must review financial statements for accuracy. “You’re going to have to leave it in the hands of professional judgment,” said Denny Berenford, a former FASB chairman and an accounting professor at the University of Georgia. “Auditors will be challenging those write-offs, and the SEC could come in and say less goodwill should be written off. And on top of that, there’s always the threat of litigation.” But the University of Miami’s Munter said that without clearer rules, accountants will be overwhelmed by companies anxious to put forward the best numbers possible. “The SEC is limited in terms of resources, so clearly it can’t look at every situation,” he said. “I think this creates an additional temptation.” Copyright (c)2001 TDD, LLC. All rights reserved.

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