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Tech Panel Criticizes FASB Rules on Pooling Method of Accounting

(January 22, 2001) Sen. Bennett, Rep. Dooley, and other members of a Washington DC luncheon panel, criticized the FASB's proposal to eliminate the pooling method of accounting. It does not reflect the realities of the New Economy, and it would hinder investment, they said.

Sen. Bob Bennett (R-UT), Rep. Cal Dooley (D-CA), Scott Jones of Esicient Technologies, and Floyd Kvamme of the NVCA spoke to about 150 people at a luncheon hosted by the National Venture Capital Association and TechNet at the National Press Club on Friday, January 19.

Current rules allow many high-tech companies to take advantage of this pooling system of accounting when merging. This method allows companies to merge without attaching a goodwill accounting charge. This is the amount paid in an acquisition that is added to the fair market value of a company's tangible assets. The Financial Accounting Standards Board (FASB) has proposed requiring that all mergers be viewed, not as the melding of separate entities, but as a direct purchase, requiring companies to accept the purchase method of accounting.

The pooling' system of accounting has made possible many mergers of high tech companies. Requiring these high-tech companies to use the direct purchase accounting system would create a disincentive to merger, and a disincentive to invest in start up companies that might benefit from merging later.

Congress does not write accounting rules. This is done by an independent body, the FASB. Members of Congress, said Sen. Bennett, want to preserve the independence of the FASB, so they are reluctant to pass legislation that writes its rules. On the other hand, many legislators believe the FASB and SEC are now out of touch with reality.

Rep. Cal
Dooley (D-CA)

Rep. Cal Dooley (D-CA) observed the once a company's value was based upon its "hard assets." He continued that "We are still trying to deal with an accounting approach that was predicated on that old paradigm. And so, a number of us got involved when FASB was making some proposals to eliminate pooling, to try to say that it is time for us to step back and understand what that is going to do to our economy."

"We are the world leader in technology in large part because we have created a financial environment that was conducive to the flow of investment capital into this sector. And changing our accounting practices by eliminating a pooling has the potential to have a very devastating and detrimental effect in terms of this flow of risk capital."

Rep. Dooley and Rep. Chris Cox (R-CA) introduced a bill in the 106th Congress to place a moratorium on FASB's ability to eliminate the pooling method of accounting. Sen. Bennett stated that he and Sen. Charles Schumer (D-NY) were prepared to file a bill in the Senate, but did not, because of the Dooley-Cox bill in the House. Sen. Bennett added that he was glad that "the folks in the House fired the shot across their bow."

Sen. Bob

Sen. Bennett suggested that the problem is that the the SEC's chief accountant and Ed Jenkins, head of the FASB, live in an "echo chamber." The only people they talk to are accountants who do not know how to value intangible assets of the New Economy. He suggested that they need to get out and talk to some businesses.

Scott Jones, of Esicient Technologies, spoke about FASB proposals to do away with the pooling method of accounting. "The important assets in our companies to day are knowledge, the intangible assets, employee talent, brands, trademarks, and the accounting standards need to reflect this. If our accounting standards and reporting structure fail to acknowledge, then the factors that drive our new economy will be undermined. There will be a friction. Transactions that need to occur won't occur. ... Efficient mergers and acquisitions won't happen."

Floyd Kvamme had this remark: "book value -- it doesn't mean anything."


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