FASB Addresses Merger Reserve Liability Funds

Under new rules proposed by the Financial Accounting Standards Board (FASB), companies would have to expense merger-related costs as they happen, rather than using one-time reserve funds, the Wall Street Journal reported.

In some cases, companies that dip in later to improve their earnings picture have used the reserve funds improperly. Reserve liabilities are often set up at the time of merger and are used for expenses such as firing staff or closing the factories of the acquired company, the Journal reported.

FASB, which writes U.S. accounting rules through the authority of the U.S. Securities and Exchange Commission, is introducing the new reserve liability rule as part of a bigger effort dealing with mergers and acquisitions. FASB is working with its London-based counterpart, the International Accounting Standards Board, to revise the rules to help investors get a better idea of companies' true financial condition.

The proposed change would "level the playing field for restructuring costs, whether they are incurred to restructure an acquired operating activity or an existing operating activity," Ronald Bossio, a senior project manager at the FASB, based in Norwalk, CT, told the Journal.

The new rules are set to take effect with deals done on or after Dec. 15, 2005. The package is due out next quarter and will be subject to public comment before being finalized, the Journal reported.

"Restructuring reserves set up in connection with acquisitions have long been used to hide the subsequent poor performance of companies from their investors," Lynn Turner, former SEC chief accountant, told the Journal. "The FASB stopping this abuse is long overdue."

You may like these other stories...

School tax breaks get House support as Democrats objectRichard Rubin of Bloomberg reported that the House of Representatives on Thursday voted to expand and simplify tax breaks for education as Republicans continue to pass...
The Financial Accounting Standards Board (FASB) has relaunched its technical agenda web page, which Chairman Russell Golden said will inform visitors at a glance on where any given FASB project stands, the steps it took to...
Tax accounting to be simplified for money-market fundsThe US Securities and Exchange Commission (SEC) voted 3-2 on Wednesday for sweeping changes to institutional money-market funds, Emily Chasan, senior editor of...

Upcoming CPE Webinars

Jul 31
In this session Excel expert David Ringstrom helps beginners get up to speed in Microsoft Excel. However, even experienced Excel users will learn some new tricks, particularly when David discusses under-utilized aspects of Excel.
Aug 5
This webcast will focus on accounting and disclosure policies for various types of consolidations and business combinations.
Aug 20
In this session we'll review best practices for how to generate interest in your firm’s services.
Aug 21
Meet budgets and client expectations using project management skills geared toward the unique challenges faced by CPAs. Kristen Rampe will share how knowing the keys to structuring and executing a successful project can make the difference between success and repeated failures.