September 1999

FASB Proposes Banning Pooling of Interests

The Financial Accounting Standards Board recently issued a proposal that would, among other things, eliminate the pooling of interests method of accounting for business combinations. As part of its public consideration of the issues, the board also will hold hearings on the subject early next year in New York and San Francisco. Comments on the proposal are requested by December 7.

"When two different accounting methods are used for what is essentially and economically the same transaction, it is confusing to investors," said FASB Chair Edmund L. Jenkins. "We believe that the purchase method of accounting gives investors better information about the initial cost of the transaction and the acquisition's performance over time than does the pooling of interests method."

Jenkins noted that FASB also considered many other issues in proposing to eliminate pooling, including:

* The pooling method provides investors with less information-and less relevant information-than the purchase method.

* The pooling method ignores the values exchanged in a business combination, while the purchase method reflects them.

* It is difficult for investors to compare companies when they have used different methods of accounting for what is essentially the same transaction.

* Business combinations are acquisitions and should be accounted for as such, based on the value of what is given up in exchange, regardless of whether it is cash, other assets, debt, or equity shares.

* Because cash flows are the same no matter what accounting method is used, the boost in earnings under the pooling method reflects artificial accounting differences rather than real economic differences.

After the comment period and public hearings, FASB will consider all comment letters and testimony as it reconsiders each issue during public meetings to be held over several months in 2000.

"We estimate that our process will be complete and a final statement issued by the end of 2000," Jenkins said.

If adopted as a final statement, the standard would be effective for business combinations initiated after the statement is published.