FASB to Propose Expensing M&A Fees

The Financial Accounting Standards Board (FASB) will propose that companies change the way they account for professional fees associated with mergers and acquisitions.

According to the Wall Street Journal, the FASB will release a draft proposal this summer that would require the fees to be booked as expenses. If the proposal is adopted by the rule-makers, it will mark a big change in how companies record the fees they pay for lawyers, bankers, accountants and other advisers to help companies complete the complicated transactions involved in mergers and acquisitions.

Companies now account for these professional fees as part of “goodwill,” or an intangible asset on the balance sheet, as if the fees were part of the acquired company's assets and liabilities.

Although M&A fees are usually less than 1 percent of a deal's total value, they add up. One example given by the newspaper is last year's acquisition by Cingular Wireless of AT&T Wireless Services Inc. The deal cost Cingular about $40 million in fees. If the rule had been in place, Cingular's $163 million in earnings before taxes and adjustments for certain accounting changes would have been 25 percent lower.

"We are aware that the FASB has proposed that deal fees be expensed,” said Cingular spokesman Clay Owen. “In our 10-K [annual securities filing], we will disclose the direct costs for legal, financial advisory and other services related to the transaction."

John Robinson, an accounting professor at the University of Texas at Austin, said, "Even if it's not a big figure relative to earnings, if it's a big absolute number it could get people's attention." He added, however, that fee expenses would lower a company's operating income and therefore could lower its tax bill.

The FASB intends the rule to provide more complete financial information since it's not now required in financial filings. The FASB will accept comments on the proposal, which would likely change before it is adopted. The FASB said the process would take at least 15 months.

Some observers say expensing the transaction costs right away may force companies to scrutinize professional fees more closely.

"Anytime we issue an accounting standard we do expect behavior to change," said FASB's Susan Bielstein.

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