Buyers (and sellers): beware of new rules.

• Author: Sinnett, William M.
• Position: Accounting

In an interview, noted appraisal expert Alfred King talks about the impact of new accounting standards and offers advice to companies weighing or actually doing transactions.

It's been more than a year since the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 141, "Business Combinations," and No. 142, "Goodwill and Other Intangible Assets." All companies were required to adopt these standards at the beginning of their fiscal year, starting with the first fiscal year after Dec. 31, 2001. The first effects of these new standards were felt earlier this year, when companies began announcing goodwill "impairment" charges, such as AOL Time Warner Inc.'s huge first-quarter impairment charge of $54 billion.

These new accounting standards will definitely affect merger and acquisition strategy, because they will govern how companies have to account for new acquisitions. A key factor in deciding what to bid for a company will be how to value and account for its intangible assets.

Alfred King, vice chairman of Valuation Research Corp., has been a professional appraiser for more than 30 years and does half or more of his work representing buyers or sellers. William Sinnett, research manager at the FEE Research Foundation, recently sat down with King to discuss how the valuation of tangible and intangible assets will affect buyers and sellers.

Please review briefly the new rules affecting M&A transactions.

King: Most readers are probably familiar with SFAS No. 141 and No. 142. Pooling of interest accounting is dead. All M&A transactions must be treated under purchase accounting rules. This means that every purchase requires a valuation of all the assets acquired, both tangible and intangible. In theory, the old rules of APB 16 and APB 17 did not change, but previously most firms did not look closely at acquired intangible assets. Now they have to,

And, of course, what is charged to goodwill no longer has to be written off periodically over periods up to 40 years. The quid pro quo that the FASB put in was to force companies explicitly to examine intangibles directly, since, for the most part, these intangible assets do have to be amortized.

The Board recognized -- and companies are now discovering -- that there will be great pressure to maximize goodwill and minimize intangibles. Because companies want to maximize reported earnings per share (EPS), there is a tremendous incentive to place as low a value as possible on intangible assets.

How did the FASB hold companies' "feet to the fire" to maximize amounts charged to intangible assets?

King: The new FASB Standard 141 actually has language very similar to...