FASB Chair Edmund Jenkins testified before the Senate Committee on Banking, Housing, and Urban Affairs in March on FASB's proposal to eliminate the pooling of interests method of accounting for business combinations in favor of the purchase method of accounting.
Few areas need improvement more than the accounting for business combinations, Jenkins said: "The current accounting literature allows two economically similar business combinations to be accounted for using different accounting methods that produce dramatically different financial results, which is confusing to investors trying to evaluate the combined companies."
Jenkins said the board's proposal to eliminate poolings represents years of research and public deliberation. At the time of his testimony, FASB had completed the public comment process, during which the board received almost 200 comment letters and heard from more than 40 individuals during four days of public hearings. He said the board's next step is to evaluate the feedback and revisit each of the issues in the proposal.
Opposition. During the public hearings, the American Bankers Association (ABA) encouraged FASB to maintain the pooling of interests method of accounting.
"The banking industry is very concerned about the loss of poolings because purchase accounting would provide misleading information about prospective net cash inflows for certain types of business combinations," ABA Accounting Committee Chair Mike Hughey said. "Pooling better reflects the long-term interests of shareholders and the performance of the combined entity."
According to the ABA's prepared testimony, amortizing purchased intangibles and goodwill in the income statement would make it difficult for users of financial statements to compare the current and prospective net income and earnings per share.
Hughey said that if poolings are eliminated, modifications should be made to purchase accounting, particularly with respect to goodwill.
The electronics and technology industry also weighed in on the subject, saying that a change to purchase accounting would dampen entrepreneurial spirit and contribute to ending the country's long run of prosperity. Under FASB's proposal, intangibles, which comprise large portions of the assets of high-tech firms, must be measured under purchase accounting rules.
Support. Some of the Big Five accounting firms are more supportive of the change, although some would like to see FASB avoid a "one-size-fits-all" approach to applying purchase accounting rules. Others would like FASB to delay the effective date of the planned rules from the current target of early 2001. *
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