Following a tentative decision reached in December, the ED requires a non-amortization approach to assessing goodwill purchased in a business merger or acquisition. Rather than being amortized to earnings, as proposed in a full-scope ED on the business combinations project last year, the new approach calls for goodwill to be reviewed for impairment. Thus it would be recorded and expensed only when its recorded value exceeds its fair value.

Goodwill was the most protested part of the board's earlier ED, and it stood as the main obstacle to acceptance of the purchase method of accounting for mergers rather than the pooling method that is widely used today. The banking sector was especially concerned about the impact that the proposed accounting would have on future financial reports.

"The business combinations project had two main parts," said Kim Petrone, FASB project manager. "One was whether we needed two methods of accounting for combinations. The other was how to account for goodwill under the purchase method. People who didn't like the purchase method really didn't like the required amortization over an arbitrary period. We were challenged to improve the method of accounting for goodwill so it reflected economic reality, so this was a major break-through."

Last year's ED on business combination thrust the board into political hot water. Both the U.S. Senate and the House of Representatives held hearings on the issue, and a bill calling for a postponement of the project pending further review was introduced in the House. It quietly died when the House ended its session in December.

If the new ED brings no overwhelming objections, the board is likely to move ahead with the purchase method, bringing the United States very close to international standards and the national standards in most other countries.

The Canadian Institute of Chartered Accountants is expected to produce a standard virtually identical to that of the United States. FASB and CICA have been working hand-in-hand on business combination projects.

While the non-amortization method may be widely accepted or at least not widely criticized, many companies may be concerned over implementing the new method. The measurement of impairment could prove difficult in some cases.

The exposure draft has a 30-day comment period ending on March 16, 2001. It is available on the FASB web site at www.fasb.org. If comments are generally supportive, the board hopes to issue a final statement in the second quarter of this year. The board does not expect to issue another exposure draft on the whole business combinations project.

-- SmartPros News Staff

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