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The Politics of Accounting.

No longer can the accounting profession rely on the Financial Accounting Standards Board and the Securities and Exchange Commission to modify U.S. accounting principles. Now, Capitol Hill wants to weigh in because, in large part, the high-technology industry has successfully used its newfound political clout to spur Congressional support for the New Economy business model.

Over the last couple of years, New Economy companies have increasingly been at odds with the detailed accounting requirements of today's financial reports. Some argue that New Economy businesses can't or won't adapt to traditional accounting standards, while others say that current financial statements are backwards -- little more than holdovers from the Industrial Age. Generally, high-tech firms believe that traditional accounting rules do not properly recognize the true worth of high-technology intangible assets such as intellectual property, research and development costs, innovative processes and a highly skilled workforce.

A good example of the tensions between FASB and New Economy businesses is the FASB exposure draft on business combinations. FASB has tentatively proposed to eliminate pooling and require a 20-year amortization period for goodwill. Since high-tech companies have been unsuccessful so far in convincing FASB or the SEC to preserve pooling or allow for expensing of goodwill, they have taken their "constituent concerns" to Capitol Hill.

High-tech companies formed a coalition and retained several lobbyists to help develop a political strategy to defeat FASB's exposure draft. Beginning in the summer of 1999, they unleashed a coordinated effort on Capitol Hill. Activities included bus tours of Tysons Corner, Va,, technology companies for Democratic Senators; letter-writing campaigns urging Congress to stop the FASB; Congressional hearings in which FASB Chairman Ed Jenkins was called to testify; Congressional staff trips to Silicon Valley to meet with high-tech executives; and strategically timed meetings with SEC Chairman Arthur Levitt and organizing fundraisers for members of key Congressional committees.

Pressure Hasn't Eased

It's no great surprise that these efforts have been successful. In July 1999, FASB decided to postpone indefinitely its consideration of the accounting treatment of purchased in-process research and development (IPR&D) costs -- a key high-tech issue. Chairman Jenkins explained that FASB had concluded that "it was not possible to address purchased R&D costs separately from other R&D costs." Although IPR&D was not a part of the business combination project, Jenkins apparently thought he could get high-tech executives to blunt their Congressional campaign if he threw them a bone such as delaying IPR&D.

Unfortunately for FASB, the IPR&D bone wasn't enough. Congressional pressure has continued, including claims that the country's technological innovation and economic growth will stop dead in its tracks if the business combination exposure draft is implemented. In response, FASB has pushed back its planned implementation date from late 2000 to mid-2001 in hopes of cobbling together a compromise that will satisfy the high-tech forces while addressing some of FASB's technical accounting concerns.

Chairman Jenkins deserves all the credit for recognizing the need to engage with Congress and the high-tech community instead of ignoring them. Most of the FASB forces are ill-equipped to handle Capitol Hill's politicians and professional staff with the finesse and diplomacy required to satisfactorily resolve this political hot potato. Chairman Jenkins possesses those skills, and FASB is fortunate to have him.

The big unknown right now is what will Congress do, if anything, if a compromise isn't reached. Congress, to its credit, recognizes its own shortcomings in this area but feels duty-bound to provide as much assistance as possible to its constituents, and it wants to keep the country's economy booming. Congress could pass a strongly worded but nonbinding sense-of-the-Congress resolution. A more draconian result could be establishing Congressional oversight of FASB -- the beginning of accounting standards regulation.

I anticipate that the former is possible sometime next year if FASB decides to eliminate pooling. However, the latter is far too distasteful and dangerous even for the most ardent high-tech supporters and New Economy promoters up on Capitol Hill to consider.

Grace Hinchman is FEI's vice president of government relations.
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Author:Hinchman, Grace
Publication:Financial Executive
Article Type:Brief Article
Geographic Code:1USA
Date:Nov 1, 2000
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