Academic journal article ABA Banking Journal

How FASB's New Merger Accounting Rules Work and How They'll Affect Your Bank. (Community Banking)

Academic journal article ABA Banking Journal

How FASB's New Merger Accounting Rules Work and How They'll Affect Your Bank. (Community Banking)

Article excerpt

Just over one year ago, the Financial Accounting Standards Board (FASB) issued its new rules affecting business combinations. Most of the provisions of the new merger rules came into play for most banks and thrifts in the middle of 2001, while certain related accounting changes became effective at the end of 2001--and even affect certain acquisitions accomplished before FASB's shift. But let's not get ahead of ourselves.

Whether your financial institution plans to buy, sell, or remain independent, chief executives and directors should understand the impact of the new rules on the industry and on their bank's value.

The rule changes were published in two separate opinions issued in July 2001. While the most significant change was the elimination of the pooling of interests method of accounting for business combinations, there were also other significant changes in the accounting for goodwill and intangible assets.

In addition to those two changes, FASB has reconsidered its position concerning transactions recorded under the provisions of Statement 72. (These were generally branch transactions involving government assistance.) Under a mid-May proposal, FASB suggests that the goodwill and identifiable intangible assets in transactions originally recorded under Statement 72 will be accounted for under the new rules.

Why the change?

FASB concluded that in each business combination there must be an acquiror. Even in what had previously been referred to as a "merger of equals," one of the predecessor companies will have to be seen as surviving the combination and thus be viewed as the acquiring company.

These conclusions will have significant ramifications on accounting for acquisitions. The pooling method produced dramatically different results than the purchase method and, in practice, the transactions to which pooling was applied were similar to those accounted for by the purchase method when stock was the consideration. In many cases it became the prerogative of the acquiror to choose the method that appeared most beneficial (to its own accounting). This aspect of pooling vs. purchase disturbed many observers.

Many users of financial statements felt that the pooling method provided less information. Pooling ignored the value of consideration exchanged in a business combination, compared to the purchase method which did record the current value of the consideration and the assets and liabilities acquired. In fact, the pooling method simply did not provide adequate information concerning how much was actually paid in a business combination. In addition, the pooling method did not record any assets or liabilities that were not previously recorded, such as intangible assets, and thus masked their presence in the transaction.

In addition, the pooling method assumed continuity of ownership interest--even though significant ownership changes usually followed a merger, with owners often enjoying newfound liquidity.

How are intangibles created?

As a result of the revised accounting for mergers and acquisitions, expect to see an increased emphasis on the recognition of intangible assets. Given that a premium is paid in most transactions, it is obvious that the acquiror is paying for something more than the fair value of the target's net assets.

In the past, there was a tendency for some intangible assets to be lumped into the general category of "goodwill." In the case of financial institutions, however, there are several obvious intangible assets. For instance, core deposit customer relationships and servicing rights have regularly been recognized. However, other "gray area" intangibles were often lumped in goodwill. Since goodwill was amortized on a regular basis prior to the new rules, it was generally accepted that this accounting did not create a material difference in the financial statements. …

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