Jumping Through Hoops: Goodwill Offers Investors Clarity and CFOs Complexity.

• Author: Ross, Sharon

While the economic slowdown has been a challenge to the bottom line for many businesses, finance and operations officers will face new hurdles in the new year in the form of mergers and acquisitions and the Financial Accounting Standards Board's new purchase accounting rules. In a move that aligns the United States more closely with international accounting standards, FASB Statement 141, Business Combinations has abolished the pooling of interests method. While FASB Statement 142, Goodwill Amortization and Other Intangibles, requires that goodwill no longer be amortized to earnings, but tested for impairment. The rulings, released in July, aim to improve the quality of financial reporting for acquisitions and give investors a clearer picture of a company's value.

"The new model is fairly revolutionary," said Norman Strauss, Ernst & Young executive professor in residence at Baruch College in New York City, during the UC Berkeley Haas School of Business' 12th Annual Conference on Financial Reporting. "FASB determined that the pooling method was not useful, it was abusive and it was flawed. And goodwill amortization was arbitrary and didn't provide useful information to investors."

Timothy Lucas, FASB director of research and technical activities, agrees. "Pooling created an incentive to twist transactions to reflect favorable accounting of a merger, and the criteria for pooling was complex.

"At the same time, goodwill amortization was not meaningful. In that aspect, the release of statements 141 and 142 is a success story. It's been the longest-running project we've accomplished, even though we haven't reached closure on some of the issues."

Indeed, the five-year FASB project went through many revisions before its final release this year. And FASB hopes the benefits of the statements will outweigh their complexity. "While I accept that the impairment judgment is complex in its own right," says Lucas, "it came about out of the necessity of making the economics of M&A transactions more clear."

A NEW KIND OF COMPLEXITY

It has been a trade-off. One set of complex standards--the pooling of interests--will be replaced by another set of complex rules--the goodwill impairment test. "Getting rid of pooling makes life simpler, but testing for when goodwill is impaired will be more robust and rigorous," says Doug Barton, a partner in merger and acquisition services with Deloitte & Touche in San Francisco.

Under FAS 141, companies must use the purchase...