The Financial Accounting Standards Board’s plan to rewrite the accounting rules for mergers has turned into a political football.
FASB has been working since 1996 to eliminate the pooling of interest method for merger accounting, and its work should be largely finished next year.
Back when the process got started, all Edmund Jenkins, the trade group’s chairman, seemed to have had in mind was bringing U.S. accounting rules more in line with international standards and leveling the playing field for all mergers and acquisitions. The pooling method is employed in many financial and high-tech mergers and permits merging companies to “pool” their financial statements at historic cost, effectively eliminating the write-offs against purchased goodwill corporate acquirers have to take.
In mergers outside the tech and financial industries, acquiring companies tend to rely on the purchase method of accounting, where goodwill is amortized against future earnings. The majority of companies outside of the tech and financial sectors are in favor of eliminating the pooling method.
But like the proverbial camel, Congress has been sticking its nose under FASB’s tent. Earlier this year, there were several rounds of hearings, and more recently, in early October, a dozen Senators, including vice presidential nominee Joseph Lieberman (Dem. — Conn.), wrote to FASB asking it to delay its action on the issue. In addition, Reps. Christopher Cox (Rep. — Calif.) and Calvin Dooley (Dem. — Calif.) introduced a bill earlier this month that, if passed, would impose a one-year moratorium on any attempt by FASB to eliminate the pooling method for mergers.
For its part, FASB has politely told the prying legislators to butt out, and it’s receiving the support of at least five other Congressmen and Ernst & Young, the big five accounting firm.
A day after Cox and Dooley submitted their bill, four of their colleagues, all of whom happen to be certified public accountants, wrote a “Dear Colleague” letter to other members of the House, asking that they reject the Cox-Dooley proposal. The letter was signed by Clay Shaw (Rep. — Fla.) and three Democrats, Brad Sherman of California, Collin Peterson, of Minnesota, and Owen Pickett of Virginia.
Last week, Rep. Christopher Shays (Rep. — Conn.), whose district happens to include FASB headquarters in Norwalk, also penned a “Dear Colleague” letter opposing the Cox- Dooley bill.
Both letters said the Cox-Dooley bill would “politicize the process” for setting accounting standards and compromise FASB’s autonomy. Since the early 1970s, the Securities and Exchange Commission has largely backed off from issuing accounting regulations in favor of private sector standards set by FASB.
Jeffrey Mahoney, a project manager in the trade group’s Washington office, said that the Cox-Dooley bill would set an unwelcome precedent that could come back and haunt the private sector.
“Most of corporate America and most investors support private sector standards setting,” Mahoney said to CFO.com. “I think you’ll see more opposition as more people become aware of this legislation.”
In the meantime, the issue still has months to play out. In his response to the letter from Sen. Lieberman and the 12 other senators, FASB chairman Jenkins said a rule formally eliminating the pooling method isn’t likely to be issued until the first quarter of next year. But Jenkins also assured the senators that FASB was “not rushing to any final conclusions.”
Kim Petrone, the project manager for the business combinations effort at FASB’s headquarters, says that several related issues still have to be resolved – – including the treatment of goodwill and intangible assets under the purchase method – – until the trade group’s board can again revisit pooling.
The board, which meets almost weekly, isn’t likely to continue its discussions on pooling before December, she said.
“Right now we’re kind of in a holding pattern,” Petrone said.