Cox Release on Merger Accounting Rules Moratorium

NEWS FROM U.S. REP. CHRISTOPHER COX

[2] Support for putting FASB's proposal on hold is bipartisan and bicameral. House cosponsors include: leading members on the Commerce Committee, which has oversight over the nation's securities markets (full committee Chairman Tom Bliley, subcommittee Chairman Billy Tauzin, and Democratic Rep. Anna Eshoo); and Democrats and Republicans interested in preserving the growth of the Internet economy (David Dreier, Tom Davis, Bob Goodlatte, Jerry Weller, Cal DooleY and Jim Moran). In the Senate, Michigan Senator Spence Abraham -- together with more than a dozen other Republicans and Democrats, including Vice Presidential candidate Joe Lieberman -- is today sending a letter asking FASB to delay its proposal.

[3] Chairman Cox raised concerns about the manner in which FASB has proceeded with its proposed changes in merger accounting rules, stating that "FASB's process must be both deliberative and transparent, especially when the consequences of a change in the rules go far beyond a determination of the quality of publicly disclosed financial information."

[4] The pooling method is basically a combination of the balance sheets of two companies, with no change in asset value. It is most often used in technology and financial service combinations. Because these industries are such significant contributors to economic growth, and because the opportunity to be acquired or to merge with another firm is a significant factor in the continued flow of venture capital to high technology, it is important to understand the impact of eliminating pooling on capital flows in these sectors.

[5] "A recent U.S. Department of Commerce study found that the Internet economy is alone responsible for 35 percent of real economic growth in the United States over the last five years," stated Chairman Cox.

[6] By eliminating pooling, the FASB proposal would leave the "purchase" method as the only acceptable accounting treatment for goodwill and other intangible assets. The purchase method requires companies to amortize goodwill over time as an annual expense, wrongly assuming that in all cases goodwill is a depreciating asset.

[7] "Over the last 20 years, market-to-book value ratios have increased threefold because of intangible assets," said Chairman Cox. "These assets, including goodwill, are very real. The assumption that intangibles are exactly like hammers, saws, and nails, which physically wear out over time, is often fundamentally wrong. In fact, it is very clear that in the information age intangibles often APPRECIATE over time. The pooling method recognizes this fact, and often makes better sense for information-based companies.

[8] "It is true that pooling is not always the best way to reflect the economic reality of a merger. The same can be said of the purchase method. Thus, FASB is proposing to remove one leg of an already shaky two-legged stool," Chairman Cox concluded. "That is why a comprehensive study of accounting for intangibles is the better course. It is Congress' responsibility to oversee this process because of its enormous impact on the economy."