The M&A Game Changes.

• Author: Rockness, Joanne W.
• Position: Mergers and acquisitions accounting regulations

The FASB has revised the rules for merger accounting, and the result in the short term may be a lot of confusion.

It has finally happened: Twenty-five years after its first discussion memorandum on accounting for business combinations and intangibles (Aug. 19, 1976), the Financial Accounting Standards Board has issued Statements 141 and 142, doing away with pooling of interests. Apparently, it took an extremely volatile stock market to finally bring resolution to 1970 accounting rules that frequently triggered a structuring of combinations inconsistent with economic reality or sound business practices.

To gain the corporate community's acceptance for the highly controversial rule, the FASB in early spring softened the blow by attaching the elimination of required goodwill amortization. The FASB's justification for eliminating pooling is enhanced comparability and understandability for investors. Will this be achieved? Or has it muddied the waters more? Acquired versus organic growth, complex goodwill impairment tests, intangible asset classification and cash-versus-stock acquisitions are but a few of the issues that may, in fact, make the new acquisition accounting less and not more comparable.

What are the future economic consequences and implications?

By its own rules, the FASB's mission is to ensure neutrality of information resulting from its standards, without influencing behavior in any direction (FASB Rules of Procedure). The board has argued strongly that eliminating pooling will level the playing field and provide more comparable and neutral information. But, once again, accounting standards are not just reporting financial transactions, but are, in fact, driving them. On March 19, the $2.4 billion merger between AmeriSource Health Corp. and Bergen Brunswig Corp. was the first deal structured to align with the new FASB statements. If the FASB hadn't issued its new statements, the deal would not have happened, according to Lehman Brothers. On the other hand, PepsiCo initiated a merger with Quaker Oats in April as a pooling, with a professed concern about the consequences of the new rules.

This is only the beginning. The new rules are poised to change the direction of domestic and international merger activity and to initially increase complexity and confusion in financial reporting, while providing significant new opportunities for "earnings management."

Key Changes

The new FASB statements include several noteworthy changes to current accounting. Statement 141 on Business Combinations: 1) requires the use of purchase accounting for all business combinations initiated after June 30, 2001; and 2) provides new criteria for determining when intangible assets should be recognized separately from goodwill. Statement 142 on Goodwill and Intangible Assets requires that goodwill no longer be amortized, but instead be subject to impairment testing at least annually. Statement 142 goes into effect for companies with fiscal years beginning after Dec. 15, 2001 and applies to all existing goodwill and intangible assets. Early adoption is available for companies with fiscal years beginning after March 15, 2001.

Comparability Concerns

The FASB asserts that the new business combination rules will benefit investors by spurring companies to provide better information on the true cost of both transactions and acquired intangible assets. It argues that investors will be better prepared to ascertain how well the investment has performed over time, and will have better information to compare intra- and inter-company performance. Will this, in...