FASB's Politically Motivated (?) Move.

• Author: IQBAL, M. ZAFAR
• Position: Financial Accounting Standards Board - Brief Article

As it fine-tuned its statement on Business Combinations A and Intangible Assets, did the Financial Accounting Standards Board buckle under political pressure from the likes of U.S. Senate Banking Committee chairman, Sen. Phil Gramm (R-Texas)? Some suggest that was the motivation behind FASB's January announcement that it had reconsidered its original approach to goodwill for business combinations.

POOLING OF INTERESTS VS. PURCHASE

The purchase method (popular worldwide) and pooling of interests method are the two methods used for recording business combinations. When a business combination is recorded using the purchase method, fair market values are used to record the acquisition. Any excess of the acquisition cost over the fair market value of the net assets of the acquired subsidiary is charged to goodwill. When the pooling of interests method is used, the acquired entity's net assets are recorded at their book values. No goodwill is recorded.

A business combination, when strictly following the intent of GAAP, can be recorded using only one of the two methods. The two methods are not options. Only one is acceptable in a given situation, depending on the nature and conditions of the business combination.

Pooling of interests is popular in the U.S. primarily because it results in higher reported earnings, subsequent to the business combination, when compared to the purchase method. There is no goodwill recorded at the time of the business combination. Consequently, there is no subsequent amortization of goodwill, resulting from the business combination, to be charged against future revenues.

FASB'S ORIGINAL PROPOSAL

In September 1999, FASB issued an exposure draft: Business Combinations and Intangible Assets. It proposed that all U.S. companies account for business combinations according to the purchase method only. FASB gave several reasons for proposing the elimination of the pooling of interests method, including:

* The purchase method is consistent with how the accounting model records acquisition of assets and incurrance of liabilities;

* The underlying rationale for using the pooling of interests method is "illogical" because the combination does not result in continuation of the same interests;

* Unlike other exchange transactions, the pooling of interests method does not record fair values of the items exchanged;

* Information produced from pooling is less useful for making decisions because it is less relevant and less reliable...