Untangling FASB'S convoluted logic. (Letters to the Editor).
The publicity surrounding these statements brings to mind the adage "watch what we do, not what we say." These statements are billed as eliminating pooling of interests accounting, a laudable goal. However, the effect of the statements is to significantly expand the use of pooling accounting. True, the minority of acquisitions previously accounted for as poolings will now be recorded at full value on the balance sheet. However, eliminating the amortization of goodwill means that the income statement effect of the majority of acquisitions previously treated as purchases will now be determined under the old pooling rules: The appropriate portion of the "excess" purchases price will not be charged to income. (I realize this will not be the case for the portion of the "excess" allocated to specific assets, but that will often be only a, small portion of the purchase price.)
The arguments used to support the nonamortization of goodwill recirculate theories that were popular in the past and have been rightly discredited. One argument is that amortization is too difficult. Because we don't know the exact life, do nothing, and the impairment test will take care of any problem. These same arguments were advanced several generations ago as reasons not to depreciate fixed assets: Properly maintained, they will last indefinitely. Furthermore, why should there be an income charge if the assets are not declining in value? These are familiar arguments and I won't discuss them here.
Let's be realistic: Obviously, companies make acquisitions in order to enhance their profits. Because companies include those profits in their income statements, they should also include all the costs of generating those profits. Under the impairment approach, any write-down will be taken in the wrong period (i.e., when the acquired company or product is no longer profitable). The company is likely to stress the "one-time" nature of the charge and encourage users of the financial statements to ignore it when evaluating the company's performance. Too many analysts will happily oblige, and the company's press release or financial statements are unlikely to disclose that this "one-time charge" is really the delayed correction of overstated profits for previous years.
A similar argument is that there are too many uncertainties regarding the determination of an asset's useful life and thus it shouldn't be done. Similar arguments were advanced when FASB proposed accrual accounting for OPEBS. Fortunately, in that case, the board did not accept those arguments.
In the interest of brevity, a final point: In the past, FASB and its supporters have implied that its processes and pronouncements are superior to those of other standards-setting bodies, such as the late International Accounting Standards Committee (IASC), on whose board I served from 1990 to 1994 as the ATCPA representative. I acknowledge imperfections in the IASC's procedures. However, when it addressed these issues, it came up with a superior standard. Let's hope that the new International Accounting Standards Board (IASB) does not feel compelled to follow FASB down the wrong path.
Ronald J. Murray, CPA (Retired) Stamford, Conn.
The writer is a former member of the Emerging Issues Task Force (EITF) and Advisory Task Force on the Consolidation Project of the FASB, the International Accounting Standards Committee (IASC), and the AICPA Accounting Standards Executive Committee.