Letters to the Editor

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APRIL 2005 - I enjoyed Stephen A. Zeff’s two-part “The Evolution of GAAP” (January and February 2005). I found his insights into the background of the standards very interesting. On two matters, however, my perspective is a little different.

The first concerns the so-called elimination of pooling-of-interests accounting. This is a good example of two old adages: “Watch what we do, not what we say,” and “To achieve your goals, change the definitions.”

Two main criticisms of pooling accounting were that companies did not have to account on the balance sheet for the fair value of common stock issued in an acquisition, and, thus, future earnings were overstated because there were no systematic charges to income to reflect the utilization of the acquired assets. Although FASB’s solution fixed the first problem, in practical terms and as a general rule it made the second problem worse because now all acquisitions are treated as poolings on the income statement. The Accounting Principles Board eliminated this abuse in 1970; it is unfortunate that the FASB reinstated it.

The apparently more restrictive impairment test does not solve the problem; it merely ensures that any write-offs will be taken only after the asset has declined in value, not while the actual declines occur. In addition, there is no requirement for companies to disclose how much previously reported income was overstated when the one-time charge is taken, and I have yet to see anyone volunteer this information.

Zeff took comfort in the fact that quite a few companies took large write-offs following the approval of SFAS 142. I do not share his comfort. First, SFAS 142 permitted write-offs taken in the initial application of SFAS 142 to be shown as a change in accounting. Thus, companies were able to avoid charging the results of bad acquisitions to “regular” income. Second, the two approaches are not mutually exclusive; the standard could have called for mandatory amortization and a tougher impairment test.

On a different issue, Zeff points out that SFAS 109 on income taxes is one of the best examples of how the asset-and-liability view led to a more defensible standard. While this is true, it also points out the compromises necessary to issue any standard. First, the standard not only permits recognizing NOL carryforwards as an asset but it also lowered the threshold requirements in the previous standard. Second, and more important, the standard prohibits discounting. It is, of course, completely inconsistent for the FASB to say that a standard is based on an asset-and-liability view and then to prohibit considering the time value of money.

Also in the February issue, regarding the article “Accounting and Reporting for Financial Instruments: International Developments,” I would like to clarify a potentially misleading statement. The authors state that IAS 32, issued in 1995, requires reporting mandatorily redeemable preferred stock as a liability and that this was similar to the U.S. guidance. In fact, the International Accounting Standards Committee (IASC) took the lead in requiring this accounting; no other standards-setting body, including FASB, had established such a requirement in 1995. FASB did establish a similar requirement a number of years later. In the interest of full disclosure, I was the chairman of the steering committee that drafted IAS 32, and I want to commend my former colleagues for taking the leading position on this issue.

Ronald J. Murray, CPA (Retired)
Stamford, Conn.

Editor’s Note: The writer is a former member of the FASB Emerging Issues Task Force (EITF) and Advisory Task Force on the Consolidation Project, the International Accounting Standards Committee (IASC), and the AICPA Accounting Standards Executive Committee (AcSEC).

Elizabeth K. Venuti, PhD, CPA
Richard C. Jones, PhD, CPA
Zarb School of Business, Hofstra University

Martin Bass, CPA (Retired)
Floral Park, N.Y.