GAAP and IFRS

FASB’s Plans for Expensing M&A Fees

Companies can currently include these fees as an intangible asset on the balance sheet.
Stephen TaubMarch 9, 2005

The Financial Accounting Standards Board expects to soon require companies to expense costs and fees associated with mergers and acquisitions, according to The Wall Street Journal.

The paper points out that companies can currently account for these fees as part of goodwill — that is, by including them as an intangible asset on the balance sheet, as if they were part of the acquired company’s assets and liabilities. Since 2001, when the accounting board implemented FAS 141 and FAS 142, companies have been able to leave goodwill on the balance sheet until it became impaired.

Sometime this summer, FASB intends to release a draft proposal that would require companies to treat fees for investment bankers, accountants, lawyers, and other advisors — which can run into the tens of millions of dollars — as expenses that would reduce reportable earnings in the year the deal is completed. The new rules could take effect as early as 2006.

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How big a dent could those fees make in an income statement?

As an example, the Journal pointed out that last year, Cingular Wireless shelled out about $40 million in fees when it bought AT&T Wireless Services. This worked out to about 25 percent of Cingular’s $163 million in earnings before taxes and adjustments for certain accounting changes.

J.P. Morgan Chase paid half that in fees — $20 million — to acquire Bank One last year. If it had been expensed, that sum would have lowered J.P. Morgan’s fourth-quarter earnings by just 0.5 percent, reported the Journal. On the other hand, J.P. Morgan completed nine other deals in 2004, according to the paper, citing Thomson Financial.

“Even if it’s not a big figure relative to earnings, if it’s a big absolute number it could get people’s attention,” John Robinson, an accounting professor at the University of Texas at Austin, told the paper. Robinson also pointed out that since the fees cut into earnings, they will probably also wind up lowering the tax bill.

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