Magazine article The CPA Journal

FASB Listens. Really!

Magazine article The CPA Journal

FASB Listens. Really!

Article excerpt

Feedback changes FASB's outlook on goodwill accounting

In Brief

Compromises Driven by Public Comments

Why bother to respond to FASB requests for comments on exposure drafts? Many believe that FASB members have already determined the outcome when the board issues an rc draft (ED). The authors contrast the September 1999 and February 2001 EDs on business combinations and goodwill accounting to illustrate that FASB will change the content of a proposal significantly on account of what it learns from comment letters. The), believe that the differences between the two EDs are significant and are traceable to the opinions from the public expressed through the exposure process. The moral they draw from the analysis is: Make use of the opportunities to comment that are part of the FASB process.

On September 8, 1999, FASB issued an exposure draft (ED) of a proposed statement of financial accounting standard (SFAS), Business Combinations and Intangible Assets. The proposed statement would supersede Accounting Principles Board (APB) Opinion No. 16, "Business Combinations," and APB Opinion No. 17, "Intangible Assets," both issued in 1970.

This ED focused on accounting for goodwill and other purchased intangible assets, as well as fundamental issues related to the methods of accounting for business combinations. Its most controversial provision was the elimination of the pooling method for business combinations. FASB members unanimously concluded that the purchase method should be the only method used to account for business combinations because it records values exchanged in a business combination transaction. Not only does the pooling method ignore the exchange values, but it also forces financial statement users to bear the additional costs of comparing the financial statements of companies that have used the pooling method with those that have used the purchase method.

After the ED was issued, significant controversy developed around the elimination of the pooling method. Of the more than 200 comment letters, more than three-quarters addressed the elimination of the pooling method. There was strong disagreement from the high-tech and banking sectors; many respondents believed that the pooling method is critical to the continuation of merger and acquisition activity.

In addition to the business sector's dislike of the ED, members of the House of Representatives also voiced their opinions of the pooling method. On October 3, 2000, Representative Christopher Cox introduced a bill that would have postponed the implementation of the ED. FASB Chair Edmund L. Jenkins spoke out against the potential legislation, saying, "The proposed bill would directly hamper the FASB's independence by legislating the timing of the FASB's proposed improvements.

The September 1999 ED also contained provisions for accounting for goodwill and other purchased intangible assets. It proposed that goodwill should be amortized on a straight-line basis over its useful life, not to exceed 20 years. A review of goodwill impairment should be performed no later than two years after the acquisition date if certain factors indicate impairment. Goodwill amortization and impairment charges should be displayed on a net-of-tax basis as a separate line item within income from continuing operations. This line item would be preceded by a subtotal such as "income before goodwill charges." The ED permitted a pershare amount in the income statement for goodwill charges and a per-share subtotal preceding that calculation.

The September 1999 ED proposed that reliably measurable intangible assets should be recognized separately as assets with a presumed useful economic life of 20 years or less, unless the intangible asset is expected to generate clearly identifiable cash flows for more than 20 years and the intangible asset is either exchangeable or its future economic benefits are controlled through contractual or legal rights that extend for more than 20 years. …

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