by Glenn Cheney
The Financial Accounting Standards Board has yet to reach its final tentative decisions on possible new accounting and disclosure rules for mergers and acquisitions, but it’s not too soon for companies to begin considering the best course of action: to expedite any planned business combinations or to hold off until new rules take effect.
The challenge for accountants and managers is to calculate where the advantage lies. FASB is likely to require more disclosures about the cost of M&A deals, which may force managers to demand lower consulting fees from lawyers and bankers. Lower fees are a good reason to wait until the new rules apply.
On the other hand, the new rules are likely to require companies to expense these fees on income statements, immediately impacting the bottom line. Current rules allow the fees to be rolled into the cost of the acquired company and amortized.
Kerry Dustin, chairman of the International Network of Mergers & Acquisitions Professionals and chief executive officer of The Falls River Group LLC, said that M&A consultants are acutely aware of the FASB project but are unlikely to lower their fees.
“There’s always a need to control costs, but the market determines our fees, and the markets have already had a reducing effect on fees because of competition,” Dustin said. “With larger firms getting rid of M&A people, there have been more M&A boutiques that were started, and there’s more competition because there are fewer deals.”
Dustin added that FASB should ask itself why fees for architects and engineers who support capital projects are not capitalized Ñ an accounting contradiction that he said doesn’t make sense.
Financial Executives International, which keeps a critical eye trained on FASB’s every move, hasn’t detected companies either expediting or postponing M&A decisions.
“Certainly, the proposed rules, which require investment banker and other fees associated with acquisitions to be expensed on the income statement, may cause companies to put more pressure on investment bankers and others to lower their fees,” said FEI president and chief executive officer Colleen Sayther. “I have not heard that companies are trying to merge before the new rules to avoid expensing; most acquisitions are economic decisions. Additionally, the accounting does not affect the cash impact of the transaction. Companies had to outlay the cash in the past and will do so in the future.”
Any eventual impact may well be global. FASB is working hand in hand, decision by decision, with the International Accounting Standards Board to produce compatible, perhaps even identical, standards. FASB expects to issue three standards that will cover the procedures for implementing Statements 140 and 141, on business combinations and the treatment of goodwill, the combination of not-for-profit organizations and mergers of mutual enterprises. The result should be not only more consistent accounting but greater transparency of costs.
The board is still months away from issuing exposure drafts. After a comment period, the board will re-deliberate and, quite likely, change some of its tentative decisions. Unless there are substantive changes, the board expects to issue new statements that could go into effect as soon as 2004. The project is slightly behind schedule as the board diverts its attention to another hot issue, the valuation of employee stock option compensation.
Dustin sees the FASB project as either an attempt to discourage business combinations or a complete disregard for the effects of new accounting rules.
“The idea that this kind of rule will cut down on mergers and acquisitions is a dumb thing to even think about,” Dustin says. “Mergers and acquisitions only occur because they make sense. So, to me, it belies the continued problem with FASB being more rules-oriented than thinking through the whole result on the market.”
FASB spokesperson Sheryl Thompson pointed out that the board listens to all constituents, from investors to financial analysts, but that standards are not written to drive the market in any direction.
“Our objective is not to influence the market,” Thompson said. “Our objective is to produce the best accounting standards possible so investors will be equipped with better information to make decisions.”
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