That possibility makes Alfred King, chairman of Valuation Research Corp., nervous. He has added up the market capitalization figures for industrial companies, utilities and financial firms with market capitalizations in excess of $1 billion. The bottom line, he says, carries the faint whiff of doom.

"For the roughly 290 industrial firms, with a total market cap of $2 trillion, the total capital (debt plus equity) is over $3.3 trillion," King said in a memo to the financial reporting committee of the Institute of Management Accountants. "This suggests that impairment write-downs of over $1 trillion might have to be taken. Those same companies have $470 billion in intangibles, and in many cases the intangibles are in excess of the market cap."

What, King asked, will be the impact on securities market when analysts and investors realize that instead of writing off $470 billion over the course of 40 years, it has to be written off all at once?

In a comment letter to the FASB on its limited scope exposure draft on the goodwill aspect of its proposed standard on accounting for business combinations, King hazards two contradictory suggestions.

"Issuance of the standard will ... trigger massive write-down, albeit non-cash charges," King wrote. "How the market will react is anyone's guess. The market could go up on the theory that bad news has been put behind. The market could go down as the net worth of many companies is literally wiped out."

King says that in theory, companies already test their goodwill for impairment, but they are using today's impairment requirements, which are quite different from the Board's new proposal. Today's approach gives companies a certain amount of leeway in making the calculation, while the new approach is relatively restrictive and straightforward. Companies will have to assess the difference between market capitalization and book value.

The FASB proposal eliminates the option of using pooling-of-interests accounting. That method will be replaced by the purchase method, which will apply to all mergers and acquisitions in the future, and accounting for goodwill by all companies that have merged or been acquired in the past.

In his comment letter, King suggested a transition rule that would have losses caused by adoption of the new standard treated as a change in accounting principle rather than running the write-down through operating expenses.

"If you do not change your thinking, you will effectively wipe out a full year's worth of operating earnings for many companies," King wrote in his comment letter. "Maybe this is theoretically correct. In our judgment, it is poor public policy."

-- SmartPros News Staff

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