FASB Ruling May Stifle Mergers and Acquisitions

In a letter to the Financial Accounting Standards Board (FASB) signed by members of the Association for Financial Professionals, the Association warned that an impending FASB ruling will cause a dangerous slowdown to merger activity and may restrict U.S. economic growth. The warning is based on results of a survey conducted by AFP of its members. Survey results demonstrated that financial professionals are convinced that adoption of the FASB ruling will interfere with mergers and acquisitions and will result in confusion to investors who will see substantially lower earnings reported on financial statements.

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. A proposed FASB standard will 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.

Of the professionals surveyed, 72 percent indicated that they would like to continue to have the choice between the two methods and 75 percent indicated that they expected to be involved in at least one merger or acquisition in the next 10 years. One-third of those expecting to be involved in merger activity viewed the proposed ruling as a hindrance to that activity.

More than half of the survey respondents felt the proposal to reduce the goodwill amortization period to 20 years was about right, with only 30 percent of the respondents indicating they felt the 20 year period was too short.

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