The Impact of The Revised U.S. Accounting Standards

In a recent study, "No Accounting For... Goodwill," Merrill Lynch analysts identified some significant benefits of the proposed FASB changes to accounting standards. These benefits included an acceleration in merger and acquisition activity and a decline in price-to-earnings ratios (P/Es) for most industries. The study, which includes an in-depth examination of the new rules by Harvard professor and Merrill Lynch accounting analyst, David Hawkins, examined 44 industries.

The proposed FASB's changes are anticipated to be in effect on July 1, 2001, and will eliminate the pooling of interest treatment in acquisitions as well as the amortization of goodwill.

"The end of pooling means that a high P/E multiple is no longer necessary to be an acquirer," said Jeanne Terrile, director of strategic research for Merrill Lynch and author of the overview. "The stronger takeover hand lies with those companies that have strong balance sheets and healthy cash flows."

Some key findings of the study include:

  • Acquisitions and consolidations will increase.
  • A few industries - waste, engineering and construction, and deathcare - may meet with significant impairment issues because a number of companies in those industries now carry a goodwill asset that exceeds their market capitalization.
  • Life insurance companies may become more active acquirers. This finding is based on observation of the merger and acquisition activities of European life insurance companies.
  • Airlines may not see much acquisition activity due to foreign ownership limits.

Other industries highlighted in the study include pharmaceuticals, utility and natural gas, and media.

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