by Glenn Cheney
Norwalk, Conn. - In a move that could change the accounting for acquisitions of financial institutions - especially of bank branches - the Financial Accounting Standards Board has proposed that such mergers follow the rules that, today, apply to other corporate acquisitions.
The exposure draft proposes amending FASB statements 72 and 9 to remove from their scope all financial institution acquisitions except for transactions between two or more mutual enterprises. The amendment would throw most banks, thrifts, savings and loan associations and similar financial institutions into the scope of the recently issued Statements 141, Business Combinations, and 142, Goodwill and Other Intangible Assets.
FASB said that the change would make it easier to compare the financial statements of acquired banks to those of other kinds of merged companies. In an effort to expedite comparability, the board hopes to issue a final statement that will apply to current fiscal years.
"We are going to try really hard to get this statement out in the fourth quarter," said Annette Such, FASB assistant project manager. "We would like to make it possible for financial institutions to adopt Statements 141 and 142 this year."
To ease the transition to the new accounting rules, the ED proposes reclassifying unidentified intangible assets recognized under Statement 72, Accounting for Certain Acquisitions of Banking and Thrift Institutions. These intangibles can be accounted for as goodwill if the transaction in which the assets arose was a business combination and if intangible assets required to be separately recognized under Statement 141 were recognized apart from the unidentified intangible assets in that transaction and accounted for separately after the date of acquisition.
The proposal also effectively expands the scope of FASB Statement 144 by including such bank-specific intangibles as depositor- and borrower-relationship assets and credit-cardholder intangible assets.
Statement 72 applied only to transactions where liabilities are greater than assets, a situation common in the acquisition of bank branches. The statement required liabilities in excess of assets to be amortized over the life of long-term assets. In the 1980s, the statement most often applied to insolvent financial institutions. Financial institutions were not within the scope of Statements 141 and 142.
The American Banking Association was a major instigator of the change in FASB standards. "The notion [of statements 141 and 142] that acquisitions of bank branches did not have goodwill associated with them was brand new to the banking industry," said Donna Fisher, ABA director of tax and accounting.
"We’d been accounting for goodwill in branch acquisitions for years. It was an unpleasant surprise. It took everyone’s breath away. It took the accounting firms by surprise," she said.
The ABA is generally pleased with FASB’s proposed rules, especially for prospective accounting. The association sees problems, however, for banks that did not segregate core deposit intangibles from goodwill when they acquired other institutions and, therefore, must continue to amortize them as if goodwill did not exist in the transaction.
"This is still an illogical answer, though it’s hard to figure out how to get to the right answer," Fisher said. "But overall, it’s an improvement because it permits recognizing goodwill in a way that is consistent with previous accounting, and it’s more along the lines of what the industry thought FASB intended when it wrote the business combination rules on goodwill in purchase accounting."
The ABA expects to write a comment letter after conferring with its members. Bankers who are familiar with the ED generally shared Fisher’s praise of the prospective parts of the proposal and her reservations regarding transition.
"Overall, we’re pleased that FASB took a look at this because the old rules were outdated and needed to be changed," said Michael Ittner, chief financial officer of Central Bank, in Jefferson City, Mo. "There’s parts of it we like and a couple parts that still need a little more work. Prospectively, the rules look fine."
FASB’s Such recognizes that the ED’s transition provisions may concern some constituents. "Transitions are always messy," Such said. "Some constituents may be concerned that they will need to amortize intangible assets that were not previously identified."
The comment period for the exposure draft ends on June 24, one week before Robert H. Herz succeeds Edmund L. Jenkins as FASB chairman. If public comments are neither too critical nor too complex, the board hopes to issue a final draft soon enough to allow qualifying financial institutions to apply the new rules retroactively to Jan. 1, 2002.
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