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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DANIEL.DAVIES at flemings.com wrote:
> OK, rant beginneth. I crave the indulgence of the list, for I rather
> suspect that I am the only person who cares about accounting standards, but
> I *do* care about them. Hate me plenty.
>
> >The essential point is that technological knowledge--not merely its
> >embodiment in machines--is an objective part of the productive forces
> >of society (and historically the most important part). Under capitalism,
> >according to the law of value, its producers
> >contribute socially necessary labor time at an enormous multiple of
> >the "standard" labor hour. The capitalists who employ it extract a
> >correspondingly enormous amount of surplus value, which they realize
> >directly, without need for any further transactions, by incorporating it
> >into their capital base. But the transactions-based accounting system,
> >which Lev rightly decries, not only refuses to recognize this, it as
> >actually quite perverse. Research and development expenditures not
> >only are not recognized as additions to capital, they are actually
> >accounted for as *losses*!
>
> All true, but based on a fundamental misunderstanding of what accounts are
> for. The *purpose* of a set of accounts is to be a record of transactions.
> The accounts of a company record the stewardship which its directors and
> officers have exercised over the previous year. Accounts are useful if one
> is valuing a company, but that is not their purpose. Their purpose is to
> allow the members of a company to keep track of what the company has done.
> When a company has spent money on research and development, then that money
> has been paid to somebody else, and is not available to the company any
> more. True, the company will be able to make profitable transactions in
> future, but it can then *account* for them in the future. Trying to make
> the accounts talk now in a timeless framework about everything that will
> ever happen from now to the end of capitalism is a perversion of their
> intent. The "15th century monk" who invented double-entry book-keeping
> invented it in order that Venetian syndicates did not have sums of money
> going astray and getting lost, not in order to aid speculators.
>
> >Once you realize this, you can grasp that "profitability" of a
> technologically
> >dynamic firm, as measured by conventional, legally required, standards, is
> >not merely irrelevant to the rational capitalist but even tends to be
> >correlated with positive investment value. Rational investors, their eyes
> >focused on the *future* returns of a firm over a long run measured in
> decades,
> >evaluate current expenditures, not for their effect on this years "bottom
> >line," but for whether or not they really are likely to build up, for that
> firm,
> >a durable "competitive (ie., monopoly) advantage." Some make right
> judgments,
> >some wrong. Those who are right will be richly rewarded, those who are
> wrong
> >will be harshly punished, financially. But in the World According to Marx
> >(ie., the real world) the technologically dynamic sectors of capital will
> >always outstrip the laggards.
>
> Absolutely so. But since the market already does this with old fashioned
> transaction-based accounts, why screw them up in order that it can continue
> to do so? Making the profit and loss account dependent on somebody's
> guesstimate of the value of future R&D strikes me as a complete lose. The
> trouble is that, in modern business culture, a piece of objective
> information (the earnings statement bottom line number) has been
> fetishised. Instead of being what it is, a summary of the transactions
> carried out in the year, the earnings number has been turned into an
> arbiter of (moral and stock market) value. And so the acocuntants, faced
> with the fact that accounting earnings are only tangentially related to
> capital accumulation, have treated this as a problem to be solved, and
> started to seriously bugger up their profession in doing so.
>
> I've always felt that accountants have been unfairly maligned as part of
> the system -- the function they perform is useful, and something like it
> would be necessary under almost any alternative other than superabundant
> Marxian utopia. Paradoxically, I'd always thought that the accountants
> were the last remaining true profession, after the lawyers, teachers and
> doctors have been brought into the web of capital. Very disappointing to
> see the likes of Baruch (the UK ASB is going in a similar direction)
> selling out the noble traditions.
>
> rant off, sorry for wasting your time, etc.
>
> dd
>
> Shane Mage
>
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