Accounting changes to affect network mergers

By Carolyn Duffy Marsan, Network World |  Business

The standards body that sets U.S. accounting rules last week reaffirmed an earlier decision to eliminate the "pooling of interests" method of accounting favored by merger artists within the network and telecommunications industries. But the quasi governmental group also indicated it would modify alternative purchase accounting rules to allay industry concerns.

The Financial Accounting Standards Board (FASB) voted unanimously to eliminate the pooling method and set a deadline of late June, after which all business combinations must be accounted for using the purchase method. The seven-member FASB is independent but is authorized by the U.S. Securities and Exchange Commission (SEC).

FASB wants to standardize all business combinations on one accounting method, and it believes that the purchase method provides more detailed information to investors.

High-tech trade groups were pleased that the FASB was willing to rethink its position on purchase accounting rules, but they remain unhappy about the elimination of pooling. They fear that eliminating pooling could significantly reduce merger and acquisition activity, reduce the amount of capital available to start-ups and otherwise stifle innovation.

"We still think that pooling should remain," says Kim Boylan, a partner with Mayer, Brown & Platt and counsel for the lobbying group TechNet. "We think that abolishing pooling could have a negative affect on the economy."

Among the network vendors that regularly use pooling are Cisco Systems Inc., WorldCom Inc. and America Online Inc. Indeed, Cisco made 24 acquisitions in 2000, many using the pooling method.

"We see no need for any change to pooling accounting at this time," says Dennis Powell, a Cisco vice president. While Powell lauds the FASB's proposed changes to the purchase method, he says "it would be premature and counterproductive to make any changes in the pooling method of accounting" until outstanding issues related to purchase accounting are resolved.

The FASB first voted to eliminate the pooling method 16 months ago, setting off a firestorm of lobbying activity by high-technology trade groups and venture capitalists trying to reverse the decision. The FASB has the authority to set accounting standards in the U.S. The SEC can reverse its decisions though it rarely does.

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