If there is one axiom to be drawn from the decline and fall of the dot-com economy, it is this: Last-mover advantage is vastly underrated. And if there is a corollary to this axiom for the finance function, it is: Early adopters often get the shaft.

Just ask Tony Ryan, CFO at Ansoft Corp. In April, Ryan was considering whether Ansoft should be an early implementer of the Financial Accounting Standard Board's two new rules on purchase accounting. Released in June, the rules are designed to improve the quality of financial reporting for acquisitions. Specifically, Financial Accounting Statement No. 141 covers business combinations, while No. 142 deals with goodwill and other intangible assets.

Deciding to go ahead and embrace the new FASB rules early on wasn't an overly tough decision, he says. For openers, the standards permit companies with fiscal years commencing after March 15, 2001, to adopt the new guidelines early (provided the first interim financial statements have not previously been issued). Ansoft's fiscal year ends April 30, so it met the requirement. What's more, Ansoft's amortization of intangibles is approximately $4.5 million. That's roughly 10 percent of the revenues at the Pittsburgh-based software maker. "We had every intention of being an early adopter," says Ryan.

But just before Ansoft was set to report its results for its fiscal 2001 first quarter — results that would reflect the new FASB standards — auditors from KPMG International advised Ryan to delay adoption for a full year. And KPMG wasn't the only consultancy proffering such advice at that time to eligible early adopters like Ansoft. Accountants at a number of professional services firms concede that they are still trying to get a handle on FAS 141 and FAS 142 as regulators at the Securities and Exchange Commission remain mum. "In reality, there didn't appear to be consensus among any of the accounting firms and the Securities and Exchange Commission about how to adopt the rules," recalls Ryan.

With his auditors' limited ability to interpret the new rules, Ryan eventually push backed Ansoft's first quarter reporting by nearly a month. During that time, the Ansoft finance chief huddled with a third-party consultant to figure out how to implement the standards.

Tony Ryan is not the only CFO who's confused by FAS 141 and FAS 142. The subjective nature of the new standards is a possible deterrent to early adoption, notes Brian Heckler, a partner at KPMG Transaction Structuring Services. Heckler says CFOs may want to wait to see how peer groups or finance managers at similar industries handle the new rules.

Not at Home on the Range
Managers at several companies appear to be ignoring that advice. In some cases, finance chiefs at businesses with sizable amounts of goodwill on the balance sheet want to stop amortizing the goodwill as soon as possible. "We considered delaying," says Applied Films CFO Lawrence Firestone, who adopted the standards on July 1. He cites better GAAP earnings comparisons relating to a recent goodwill-heavy transaction. "I think it helps the investing public get an understanding of the true operating run rates of the business," he says.

At Daisytek International, CFO Ralph Mitchell started applying the provisions of the new FASB standards on April 1. Although the SEC has issued statements noting that a company should seek independent counsel for valuations — if the company does not have the expertise in- house — Mitchell has not hired any valuation consultants. The Daisytek CFO, a former investment banker, seems comfortable relying on his expertise — along with that of his finance staff and auditors — to interpret the new FASB goodwill standards. "I don't know that I need to pay a lot of money to some guy to tell me exactly what my goodwill is," he explains.

Mitchell's banking experience should prove useful, that's for sure. To perform the goodwill impairment test under FAS 142, a company must first identify its reporting units, separating certain intangibles from goodwill. The company then allocates goodwill and intangibles to those reporting units for a two-step test.

The first of those steps is to assess the fair value of the reporting unit(s). In doing so, a company can determine whether the acquired goodwill associated with a reporting unit is impaired. If the fair value is less than the reporting unit's carrying amount, the company moves to the second step of the test, which determines the size of the impairment. "I think there are times where it will be very obvious where there is no impairment whatsoever," Mitchell asserts.

The Daisytek finance staff will be finished with the first step by next quarter. Mitchell, a big proponent of cash flow analysis for determining fair value, says he's supplementing the methodology this year by using sales of comparable companies and marketplace multiples, as prescribed in FAS 142. "The problem with that is that there's never really a good comparable to the thing you want to look at," he notes. "You end up with different comparisons and justifications for moving up and down. You get to a range and you have to work out what works for you in that range."

Cash and Carry
Finding an acceptable middle ground can be difficult. Mitchell cites a major goodwill component for which Daisytek did an appraisal last year to determine impairment. While the company is doing better now, he says he wants to make sure his assessment jibes with the wording of the new FASB standards. "The work won't be in me having a common sense approach to whether I've got a problem," he says. "The work will be me making sure I've looked at the exact words and say, 'Now, did we really do that?' " Such backchecking can be a pain for finance staffers. "A lot of the times that's really where reporting becomes a bit of a hassle," argues Mitchell. "You end up 50 percent common sense and 50 percent wanting to justify you've met the letter of the rule."

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