Accounting & Tax

Will Christmas Come Early for Corporate America?

FASB may wipe out remaining goodwill write-offs
Craig SchneiderDecember 8, 2000

If you have completed a merger in recent years, you may wind up enjoying a windfall, courtesy of FASB.

In less than two weeks, companies that still have purchased goodwill to amortize on their books may learn that they no longer need to take further write-offs.

On Wednesday, FASB recommended new accounting rules that are applied to mergers. One proposal calls for ending the current practice of automatically recording goodwill and amortizing it and currently for up to 40 years. Instead, companies would amortize the goodwill only if and when they determine that the value of goodwill is impaired.

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But FASB has yet to address whether the ruling will be retroactive in some manner, whereby companies merged under the old rules no longer have to amortize remaining goodwill. Tim Lucas, FASB director of research and technical analysis says the staff has tentatively scheduled a meeting on December 20 to address this very issue.

At least one pro, respected Lehman Brothers accounting analyst Robert Willens, is calling for the rule to apply to deals completed prior to a new FASB ruling. “It would be good if it’s made applicable to existing goodwill to eliminate any confusion and, more importantly, make things more comparable,” he says.

Without comparability, Willens argues, some companies using the old amortization method will continue to have penalized earnings, while many companies completing acquisitions after the new goodwill ruling’s effective date will have less earnings dilution.

The argument is certainly not lost on Lucas. He agrees with Willens that canceling companies’ remaining merger-related write-offs for goodwill would relieve comparability concerns.

Although he won’t tip his hand, Lucas says that if the rule is made retroactive from the time that the new standards go into effect, it would make the most sense to immediately halt whatever write-offs are left to be taken.

So, for example, if a company made an acquisition 10 years ago and was writing off an asset over a 15-year period, two-thirds would have already been amortized and one- third would still be slated to be written off. Under a retroactive policy, the company would stop amortizing that one-third.

However, Lucas is quick to add that the decision is not quite so simple. “Under the approach agreed to [Wednesday], it’s a harder question,” Lucas tells CFO.com. “I have no idea where the board is going to end up. I could see how you could say not to amortize old goodwill. But there’s some difficulty with that {comparability}.”

There is difficulty under the new proposal, too. When companies make acquisitions, they won’t be required to take write-offs. Rather, they will just have to establish how to measure fair value and impairment for goodwill. “That would depend on materials put together at the time of the acquisition,” he says. “And that would not necessarily be available for an old transaction.”

Lucas concludes, “There’s not an obvious answer.”