A column in the LA Times Business section of January 13, 2002, inspired by the Enron debacle, spoke of ". . .brokerage analysts who never met a stock they didn't like; [and] accounting firms that never met a 'pro forma' earnings statement they couldn't certify." We wonder why the article omitted any discussion of what we consider the large number of poolings of interest abuses during the merger mania of the past two years. It seemed as though the wild days of the late '60s had returned. The abuses of the '60s caused the release of APB Opinion 16, Business Combinations, in August 1970, which in turn spawned dozens of amendments and interpretations in the intervening years.
On June 29, 2001, the Financial Accounting Standards Board approved the issuance of two Statements of Financial Accounting Standards, numbered 141 and 142. Statement 141 effectively eliminates the pooling of interest completely excepting only qualifying transactions that were initiated prior to July 1, 2001.
Statement 142 supercedes APB Opinion 17, Intangible Assets, requiring that goodwill and other intangible assets be amortized over a life not to exceed 40 years. Statement 142 carries forward those provisions of APB 17 which relate to the continued expensing of internally developed intangibles such as patents.
While eliminating (billable) decisions about poolings and related matters,in our opinion the Standards Board has created a new aspect of accounting practice: valuation. The Standards Board has suggested a variety of valuation techniques and we strongly suspect that these would need to be performed in conjunction with company auditors.
Under Statement 142, goodwill and intangible assets with indefinite lives are no longer to be amortized but reviewed annually, or more frequently if some indication of suspected value impairment arises. Goodwill and indefinite lived intangible assets are to be tested for impairment between annual tests if circumstances arise that might reduce the fair value of the asset to an amount below its carrying value. Such occurences might be unanticipated competition; a loss of key personnel; or an adverse action by a regulator. Statement 142 does not impose a limit on amortization periods of intangible assets that have finite lives.
The amortization provisions of Statement 142 applied immediately to goodwill and intangible assets acquired after June 30, 2001. Goodwill and intangibles acquired prior to that date were or will be affected as the Statement becomes effective for fiscal years beginning after December 15, 2001. In all cases the Statement becomes effective as of the beginning of a fiscal year.
It's most definitely a step in the right direction!