The Financial Accounting Standards Board (FASB) yesterday changed a previous decision about the reporting of goodwill on financial statements. The new position will benefit companies making acquisitions of other companies.
Currently, merging companies have an option to use a pooling-of-interests method of accounting, which combines the book values of both companies in the resulting merged company. The alternative purchase method of accounting requires the purchasing company to recognized the assets and liabilities of the acquired company at fair value. The portion of the cost of the acquired company that exceeds the fair value of assets and liabilities is reported as goodwill.
The FASB had proposed a standard that would prohibit the use of the pooling-of-interest method and will also force acquiring companies to amortize the goodwill that results from using the purchase method over a period of 20 years as opposed to the currently used 40 year period. The proposed standard was met with opposition within the accounting industry.
Yesterday, the FASB partially reversed its decision and indicated it eliminate pooling but will allow goodwill to remain on the books indefinitely, until the company determines that the operations of the acquired company are performing so poorly that a write-off is needed. There will be no particular write-off period required for goodwill.
The FASB has not yet decided whether companies merged under the old rule will be able to halt the amortization of good will. The final rule on pooling and goodwill amortization is expected in the spring of 2001. No effective date has yet been disclosed.