U.S. Proposes to Ease Merger Write-Off Rules

U.S. accounting-rule makers proposed letting companies ease the bottom-line impact of writing off some merger costs, in a move to soften opposition to broader proposed changes in bookkeeping rules for corporate acquisitions.

The Financial Accounting Standards Board on Wednesday modified a proposed rule to change the way companies account for “goodwill,” or the premium an acquiring firm pays over the book value of another business’ assets.

If the proposal is adopted, companies would be able to periodically assess the value of goodwill carried on their books and take write-offs against earnings only when that value has fallen.

Under current purchase accounting rules, by contrast, the entire amount of goodwill from a merger must be “amortized” over time through regular write-offs that can cut reported earnings for years.

The FASB’s action is part of a bigger, much-debated effort by the group to ban an alternative method of merger accounting--”pooling of interests”--that eliminates the need for goodwill write-offs altogether.

The FASB’s long-standing proposal to end pooling accounting has drawn criticism from technology companies--including many in California--that say goodwill write-offs can artificially cut reported earnings and discourage mergers.

Though the FASB’s new proposal would ease requirements about how much goodwill must be written off, the plan also would change the way firms itemize the costs of an acquisition, analysts said. Those changes would move some costs that are classified as goodwill into other bookkeeping categories, where they still would probably have to be amortized over time.

Final FASB action on merger accounting changes could take months. The FASB’s statement Wednesday said it has no deadline for review and doesn’t expect final action before late-winter 2001.

In an acquisition, goodwill represents the portion of the purchase price that can’t be attributed to specific tangible and intangible assets. FASB, however, wants companies to try hard to identify many of the intangibles instead of lumping them into a general category for goodwill.

Companies currently in a stock-swap acquisition can escape goodwill charges against earnings by using the pooling method of accounting, in which merging companies simply meld their books.

The pooling method in recent years has been particularly popular among tech companies, where businesses may have relatively few physical assets. In those cases, goodwill could amount to the vast majority of the purchase price in many mergers--creating massive write-offs over periods of years if pooling accounting were banned.