The following article is adapted and reprinted from the M&A Tax Report, Vol. 10, No. 1, August 2001, Panel Publishers, New York, NY.

POOLING DEAD NOW

By Robert W. Wood

M&A Tax Report readers have had warning for quite some time that pooling of interest accounting was being nixed by the Financial Accounting Standards Board (FASB). See Wood, "Pooling Perambulations: Lock-Up Options and Termination Fees," Vol. 8, No. 6, The M&A Tax Report (January 2000), p. 1; Wood, "Pooling of Interests Accounting to be Ousted," Vol. 7, No. 11, The M&A Tax Report (June 1999), p. 1; and Wood, "Pooling: One More Word," Vol. 7, No. 12, The M&A Tax Report (July 1999), p. 7.

As expected, the FASB has unanimously voted to enact new standards, eliminating the pooling of interest treatment. Pooling allowed merging companies to combine assets without recording any goodwill. As a result, pooling became awfully popular, especially during the go-go years (which regrettably left us over a year ago now!). Pooling was extremely popular precisely because the alternative required companies to write down the value of goodwill assets. This so-called "purchase" accounting was considered anathema by most companies and professionals when the FASB first started dabbling with the idea of eliminating pooling.

Although there was a great hue and cry about eliminating pooling, that opposition was hushed considerably, when last year the proposal was made to eliminate goodwill amortization. Companies will now be allowed to leave goodwill assets on their books until they determine those asset values have become impaired. At the point of impairment, the companies will be required to take write-downs to reduce goodwill assets to their fair value.

It's Too Late Baby...

If pooling was on your list of things to do, it is too late now. June 30, 2001 was the last day companies could enter into pooling transactions. For companies with calendar years, the new goodwill rules will take effect January 1, 2002. Some companies will be allowed to adopt the new goodwill rules earlier at their discretion. Such early adoption is allowed for companies with fiscal years beginning after March 15, 2001, as long as the company has not yet issued their fiscal first quarter financial statements. See "FASB Enacts Standards Prohibiting 'Pooling' in Mergers," Wall Street Journal, July 6, 2001, p. C16.

Reprieve or Reprise?

As recently as a few weeks ago it was expected that the June 30, 2001 deadline might be the subject of a reprieve (until July 31 or so). See Michaels, "New Rules May Be Delayed For Merger Deals," Financial Times, May 16, 2001, p. 5. However, the FASB did not decide to give beleaguered investment bankers a break. And after all, the June 30, effective date had been expected for a long, long time.

As it happened, the FASB met on May 16, 2001 to deal with three different issues — asset and disposal, goodwill, and qualifying special-purpose entities — brought up in three different exposure drafts. The FASB reconsidered asset disposal issues, plus resumed discussion of the exposure draft, "Business Combinations and Intangible Assets' Accounting for Goodwill." It also reconsidered the FASB staff's proposed guidance on servicing activities of qualifying special-purpose entities (QSPEs).

Asset and Disposal Issues

The FASB examined the recognition and measurement provisions for impairment of assets to be held and used. Both recoverability cash-flow estimates and fair-value measurements were used. In addition, the board answered several questions on the recognition and measurement provisions of the exposure draft.

One question was whether to retain the recognition (the undiscounted cash-flow recoverability test) and measurement (fair value) provisions for the impairment of assets to be held and used. The FASB reaffirmed by a vote of five to one the exposure draft's position. The board also reaffirmed three points on the recoverability of cash flow that were part of the exposure draft.

Cash Flow Flap

The board engaged in considerable discussion on the recoverability of cash flows. It eventually settled on a hybrid answer. On the fair value measurements, the FASB dealt with four items, approving one (B) as it appeared in the exposure draft. But on item (A), the board decided to eliminate references to valuation techniques other than present value (that is, option pricing models, matrix pricing, option-adjusted spread models, and fundamental analysis).

On (C), the board retained the concept but requested that the FASB staff change the location of the text. On (D), the board determined that additional guidance for the estimation of future cash flow used to measure fair value should be retained, but that those estimates should be applied on a pretax basis.

Goodwill — There's the Rub

There were several items on the FASB's agenda regarding the exposure draft, "Business Combination and Intangible Assets' Accounting for Goodwill." Among other topics, they included: fair value measurement; the order of impairment tests; allocation guidance at transition; effective date for goodwill and intangible assets statement; income statement display for first impairment loss; effective date for elimination of pooling (Yikes!); and effective date for the business combinations statement.

The FASB agreed that significant clarification was needed. On impairment tests, after considerable discussion, the FASB agreed that a test for long-lived assets should precede the goodwill impairment test. This departs from the position taken in the exposure draft. However, the FASB left intact the exposure draft on allocation guidance at transition (so all goodwill should be allocated to reporting units).

Transition and Effective Dates

The FASB staff prepared a chart providing six alternative positions as to which effective dates were appropriate. The fourth alternative was chosen, providing for fiscal years beginning after December 15, 2001, with early adoption permitted for fiscal years beginning after June 15, 2001. This effective date will apply to the board's tentative decisions on goodwill as well as to its decisions on other acquired intangible assets, whether purchased singly, in a group, or as part of a business combination.

The board decided to shift its position in the exposure draft on the subject of income statement display of a first impairment loss. An impairment loss recognized in the year of adoption will be treated as a change in accounting principle.

It Is Finally Here (or Gone)!

A controversial decision within the business combinations project was the elimination of pooling. Despite the earlier contention on this issue, the FASB affirmed that pooling would be prohibited for combinations initiated after June 30, 2001. The FASB also indicated that all other provisions, including the adoption of the purchase method, and the recognition of identifiable intangible assets separately from goodwill, would also become effective after June 30, 2001.

Pooling Dead Now, Vol. 10, No. 1, The M&A Tax Report (August 2001), p. 6.