Proponents of pooling still hope to retain this 50-year-old method of accounting, which is used for the majority of U.S. corporate mergers. But at a minimum they are seeking changes to the purchase accounting rules to better reflect the realities of today's economy, where most of a company's value is in intangible assets such as people, intellectual property and brand names rather than in factories or inventories. Specifically, they want to eliminate the purchase accounting requirement that a company amortize -- or take a charge against earnings -- for its intangible assets over a pre-determined length of time.
Congress got involved in the accounting debate last spring, holding hearings to gauge the impact on the economy if the pooling method were to go away. By fall, when it looked as though the FASB would not reconsider its position, two California congressmen introduced legislation that directed the SEC to set a moratorium on any FASB decision to eliminate pooling until a study could be done on its economic impact.
The logjam started to break in December, when the FASB made a tentative decision to change the purchase accounting rules for goodwill, or intangible assets. Instead of being automatically amortized, goodwill would be reviewed for impairment, that is, written down and expensed against earnings only when it declined in value.
This new approach to goodwill, which the FASB reaffirmed last week, is viewed as a possible compromise by many in the high-technology community, which is cautiously optimistic about the FASB's direction.
"We're not out of the woods yet, but we're very encouraged by the FASB's recent announcements about their change in attitude toward amortizing goodwill," says Paul Brownell, vice president for public policy at the National Venture Capital Association (NVCA). "However, there are still some questions remaining with their impairment proposal."
"The FASB's plan for an impairment test that would assess the real-world value of goodwill would enable companies' financial statements to more clearly reflect economic reality," Cisco's Powell says. "We are pleased the FASB is moving in this direction."
Many details of the FASB's goodwill impairment test still need to be worked out, including how frequently it must be done. High-technology companies prefer the expensive and time-consuming impairment test be done only when a triggering event occurs, rather than every year.
Another outstanding issue is how the FASB will handle intangible assets that are hard to separate from a company's overall business plan.