The changes to goodwill accounting and elimination of pooling have largely been met with positive reviews from the financial community. But according to a recent Merrill Lynch study, a number of CFOs may be in for a rude awakening as they start putting the new rules into practice.
Many senior financial execs have already been dealt a reality check as the target July 1 implementation date set by the Financial Accounting Standards Board (FASB) fast approaches. “The speed at which this new proposal is likely to be implemented has caught many CFOs by surprise,” notes Jeanne Terrile, director of strategic research at Merrill Lynch, in the report entitled “No Accounting For… Goodwill”.
Specifically, as the rule takes effect, the focus will shift from impacts on the income statement, such as boosts to EPS, toward impacts on the balance sheet. Herein lies the difficulty for CFOs, who will be required to test goodwill assets for impairment.
“[The new accounting changes] are likely to absorb a lot of man-hours inside corporate offices (for a while, this may be for CFOs what the impending millennium was for CIOs in 1999),” she adds.
Moreover, CFO.com recently reported in an earlier CFO.com story, that the experts are still ambiguous about some of the procedures proposed by the FASB. The Board still has to consider fine tuning the revised Exposure Draft in response to letters that it has received.
Merrill Lynch’s study of 44 industries finds that the FASB changes will result in accelerated merger and acquisition activity for companies with strong cash flows as well as a decline in P/E ratios for certain industries.
Other key conclusions:
Alas, few CFOs are publicly acknowledging that the new accounting rules will make their companies more aggressive acquirers. “Our surveys of CFOs almost without exception indicate that, for the record, no company is abandoning long held acquisition criteria such as discounted cash flows, internal rates of return, etc,” Terrile notes. “Most say that their approach to acquisitions will not change.”