Controversy Delays Rule on Pooling Yet Again.

Pooling remains an endangered species, but its active life looks like it will e a bit longer.

The popular accounting treatment still doesn't look likely to survive a challenge from the Financial Accounting Standards Board, but FASB has agreed to delay any decision into 2001 after a flurry of criticism that drew some 400 comment letters to its exposure draft, most of them negative -- including several from FEI seeking a delay in implementation.

Those most opposed to any ban on pooling remain venture capital firms and high technology companies (see Washington Insights, page 65). They have faulted the FASB's proposal on public policy grounds, maintaining that eliminating pooling will suppress merger and acquisition activity and stifle the entrepreneurial spirit and innovation that have fueled the U.S. economy in recent years. The banking community has also voiced strong opposition. Bankers believe that the high level of consolidations in recent years -- widely believed to be a positive force, removing excess capacity from the industry -- would be lowered dramatically if pooling is eliminated.

Still, a large number of respondents support the Board's fundamental conclusion about purchase accounting: All business combinations are acquisitions, and should, therefore, be accounted for on the value exchanged (whether the consideration takes the form of cash, debt or equity).

However, some who disagree with the FASB's premise maintain that mergers are fundamentally different from acquisitions, and that accounting for true mergers of equals requires using a different method than purchase accounting. They argue that eliminating the pooling method for those transactions is not conceptually correct, and that both methods should be preserved because each produces accounting results that appropriately reflect key differences in the ownership, structure and strategic intent of the combined entity. The Board's response, however, is that transactions in which control over the combined entity is equally shared rarely, if ever, occur -- and that the disadvantages of keeping two accounting methods outweigh the advantages of having a separate method for those extremely rare transactions.

High-tech companies also point to the perceived deficiencies in the way that purchase method accounts for intangible assets. One of these criticisms is the difficulty of comparing firms that have developed through business combinations with others that have developed through internal growth. By using pooling, that comparability problem does not exist, because intangible assets are not recognized on the balance sheet and there is no amortization expense on the income statement.

In response to the objections, the FASB has offered a principled defense. First, it argues that the use of two methods of accounting for the same transactions makes it difficult for investors to compare the financial statements and performance of companies using different methods. Second, the Board maintains that the present situation creates an unlevel playing field. Because companies using pooling aren't burdened by goodwill amortization and similar charges, many believe those companies are willing to pay more for targets than those that must use the purchase method. Third, the Board points out that the U.S. is out of step internationally, since most other countries either prohibit pooling entirely or permit its use only on an exception basis. In an increasingly global investment world, then, pooling represents one more impediment to harmonizing the financial statements of U.S. and foreign companies.

Finally, use of the pooling method has been costly to firms and standard-setters, the FASB argues. Since the current standards were issued in 1970, numerous interpretations of the rules have been needed to clarify questions raised by companies trying to use pooling. The high degree of maintenance required has led many to believe that the current accounting rules are broken.

In answering those who believe that accounting standards should help achieve certain public policy goals, L. Todd Johnson and Kim Petrone, FASB project managers, have written in a joint statement, "The Board has long ago concluded that its only public policy position is to maintain and enhance the integrity of accounting information so that capital market participants are on an equal footing." Petrone adds, "In the context of business combinations, that means accounting standards should not themselves seek to encourage or discourage combinations. Instead, those standards should portray the results of those combinations fairly and evenhandedly."

During the months expected before any new rule is finalized, the FASB is working on accounting for goodwill and other intangible assets. The Board is focusing on three methods of accounting for goodwill -- an amortization approach, a nonamortization approach and a combination of the two methods. It is also continuing its research on various methods of reviewing goodwill for impairment.

The FASB expects to discuss accounting for goodwill and other issues related to the purchase method at public meetings through November. The Board will also continue to consider preliminary decisions on whether to retain pooling, but not until it has reached a set of tentative decisions about accounting for goodwill. However, Petrone says it is "unlikely" that the Board will change its views on pooling.