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During the M&A boom of the late-1990s, investors often had no way of knowing whether companies were camouflaging slow growth with aggressive — and even reckless — dealmaking. The Financial Accounting Standards Board hopes to change that. The private standards-setting group is proposing that companies separately disclose the profit and revenue of acquired businesses. The disclosure requirement, which would apply from the date an acquisition closes to the end of the buyer’s fiscal year, is aimed at helping investors distinguish whether a company’s growth comes from existing operations or from an acquisition. The new rule is part of a series of proposed changes in accounting and disclosures practices for business combinations that FASB expects to release by the end of the year. FASB is also considering tightening how companies account for merger-related restructuring expenses, such as the cost of relocating employees and bookkeeping for earnouts. Ron Bassio, a project manager at FASB, said investors want this kind of information. “Users [of financial statements] indicated to us that it would be helpful to have this information, especially in the period following an acquisition when a lot of things are going to change,” he said. Under current accounting rules, companies must report income but are not required to say whether profits stem from acquisitions. “When you look at the financial statement, it will give you an opportunity to see how much revenue came from the acquired company,” he said. Industry participants agree that the proposed rule would present a fuller picture of corporate growth. “This proposed rule is an effort to make very transparent information on companies that buy other companies,” said Raymond Beier, a partner at PricewaterhouseCoopers. “It is difficult for investors to understand true growth rates, and financial statements don’t tell you what amount of growth came from existing operations and what came from acquired businesses.” Corporations historically have balked at this level of disclosure, but a string of high-profile accounting scandals has put pressure on companies to change. Still, the rule contains the inevitable loophole. Distinguishing financial data may not be practical for companies that have already integrated, Bassio said. “This is a soft requirement,” he added. “[Auditors] might not be able to do it with all companies.” More important, the proposed rule is unlikely to directly affect a company’s acquisition strategy. “Acquisitive companies will still be acquisitive,” Beier said. “However, it does force extremely acquisitive companies to reveal where their growth is coming from, and that kind of disclosure is very important to investor decision making.” For instance, investors in Tyco International Ltd. would have had a clearer view of the company’s finances before the Bermuda-based conglomerate’s accounting debacle last year, said Robert Willens, a tax and accounting specialist at Lehman Brothers Inc. Although the FASB disclosure requirement would not have prevented Tyco’s accounting problems, it would have helped investors to more accurately value Tyco’s stock, he noted. “Investors want to be able to distinguish between organic growth, which is highly valued, and acquired growth, which is not valued as well,” Willens said. The proposed rule is “about providing better information to investors rather than creating an information requirement to prevent economic activity,” Bier added. “Investors should be pleased that the FASB is considering such an action.” Copyright �2003 TDD, LLC. All rights reserved.

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