The pooling-of-interests method accounts for a business combination by adding together the book value of the assets and equities of the combined firms. It generally leads to a higher reported net income for the combined firms than would be reported had the business combination been accounted for as a purschase because the market values of the merged assets are generally larger than their book values. Now I realize that the operative word here is generally and that's where the rub comes in---how do you establish fair market value? Particularly in a merger between two large firms. It would take a small army of auditors and tax attorneys to figure out even the superficial aspects of the deal. I do tend to think the pooling-of-interests method should be frowned on by the government.
On another level how about all these SEC filings with addresses on them in the Grand Cayman islands?
What would A.A. Berle and his pal Means think?
Your email pal,
Tom L. Peter Kilander wrote:
> April 26, 1999
> NYT Op-Ed pages
>
> Merger Accounting: Fiction on Wall Street
> By FLOYD NORRIS
>
> Question: What do you get when you add two and two?
> If you think the only possible answer is four, you are obviously not an
> accountant who specializes in mergers. These days, there can be wildly
> different answers depending on which method of accounting you use, not to
> mention what country you are in.
> Now the people whose job it is to set accounting standards are trying to
> standardize things. That effort is bringing fear and trepidation to
> corporate boardrooms amid forecasts that anything that reduces accounting
> flexibility could depress the merger wave that has enriched both
> stockholders and investment bankers. The deal makers may well provoke a
> battle in Congress if the rule makers are not nice enough to them.
> The first salvo was fired last week when the Financial Accounting Standards
> Board -- the American rule maker -- voted unanimously to abolish a type of
> merger accounting called pooling. That accounting, which is not allowed in
> other countries, lets a company that buys another one pretend it paid far
> less than it really did. So assets go on the books at a fraction of their
> value, and when they are sold it looks as if there was a profit even if
> there was not. Companies that want to make acquisitions love pooling.
> The F.A.S.B. is to be commended for that decision, but harder work lies
> ahead. Now it will decide what changes need to be made in the other form of
> merger accounting, called purchase accounting. Corporate America hopes the
> board will set rules that let companies get costs out of the way as quickly
> as possible, ideally in a way that is more likely to be overlooked by
> investors and that minimizes the reduction in profits that are to be
> reported in the future.
> If the board does not go along with corporate wishes, says Robert Willens,
> an accounting analyst at Lehman Brothers, "people will not stand for it" and
> "it is almost inevitable that Congress will get involved."
> What is amazing about all this is that the accounting should not matter,
> since it does not affect the actual cash income of the merged company. But,
> says Ed Jenkins, the chairman of the F.A.S.B., corporate executives tell him
> that they fear investors will not understand and will send a stock price
> down if reported earnings are affected. And, he notes, many executive bonus
> plans are tied to reported earnings.
> The current system has been widely abused and has needed reforming for
> years. Because accounting for deals is so complicated and contradictory, it
> has become difficult even for accountants to compare companies. Moreover, it
> sometimes turns out that one would-be buyer of a company can use a preferred
> accounting treatment but a rival bidder cannot. That gives the first bidder
> a big advantage. Standardization will help, even if the rules are generous.
> Accounting rules once were highly technical things that drew little
> attention from Congress. But that changed in 1994 when the Senate voted
> against a proposed accounting rule that would have reduced reported earnings
> by companies that issue a lot of stock options. The F.A.S.B. backed down,
> and companies were emboldened. But an effort to get Congress to overturn a
> new rule on accounting for derivatives flopped last year.
> The high-tech companies that were the angriest about the options rule are up
> in arms again because they fear that investors will be alarmed by lower
> reported earnings. If the accounting board does get tough, it will be
> interesting to see if Congress again intervenes.
> In the meantime, the prospect of tough accounting rules on mergers is likely
> to intensify the merger boom, as companies try to get deals done before the
> end of next year, when the new rules would likely take effect.
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