Testimony of

Kimberly J. Pinter
Director, Corporate Finance and Tax
National Association of Manufacturers

On behalf of the National Association of Manufacturers
before the Committee on Banking, Housing, and Urban Affairs
United States Senate

On Business Combinations and Intangible Assets

10:00 a.m., Thursday, March 2, 2000 - Dirksen 628

I. Introduction

Good morning, Mr. Chairman, Members of the Committee. I'm Kimberly Pinter, director of corporate finance and tax for the National Association of Manufacturers (NAM). The NAM is the nation's largest and oldest multi-industry trade association, representing 14,000 members in every industrial sector and in all 50 states. A significant number of our members are frequent or current participants in merger and acquisition (M&A) activity and have a vested interest in the outcome of the Financial Accounting Standards Board's (FASB) Business Combinations and Intangible Assets project.

II. Pooling

The centerpiece of this project is the proposed disallowance of the pooling-of-interests method of accounting. The NAM finds this proposal objectionable based on a number of different factors.

First of all, the NAM disagrees with the FASB's underlying premise that all business combinations are substantively the same. My personal observation as a non-accountant is that it seems very odd that the term "M&A" would be standard jargon if "M's" and "A's" were really exactly the same thing.

Substantively, a transaction in which a shareholder remains a shareholder fundamentally differs from one in which the shareholder cashes out. The pooling method respects this continuity. The criteria for using the pooling method are already quite strict and reflect the primary factors of such continuity. The FASB contends that by eliminating pooling they will be aiding comparability of financial statements - making like things look alike. It is the NAM's position that not all transactions are alike, and that while like things should look alike, dissimilar things should look different.

Additionally, there are substantive problems with the purchase method that should be addressed, particularly before the elimination of pooling, should its elimination ultimately be determined to be an appropriate goal. These problems center around the valuation of intangibles.

The NAM's first concern in this area is the proposed halving of the maximum allowable period over which to amortize goodwill charges. The FASB has taken the position that goodwill is a diminishing asset. The NAM disagrees with this premise. In the case of a successful merger, goodwill should actually increase. Goodwill results because the value of a company is greater than the sum of its parts. Following from that, every merger participant is hopeful that a successful merger will yield more than the sum of its parts.

Furthermore, even if we were to accept the idea of goodwill as a wasting asset, it has been conceded that goodwill cannot be reliably measured nor its actual useful life determined. Therefore, the arbitrary limit of 40 years was set some time ago. The companies and markets have acclimated to this standard. Now, with no more accurate or useful way to account for goodwill, the FASB is proposing to replace one arbitrary limit with another - in a way that would significantly and adversely affect our members' financial statements.

The problems inherent in the valuation of goodwill are not unique to goodwill. Technological advance has fueled a whole host of new intangibles, many of which are equally difficult to characterize and value. They are, if you will, a by-product of the "new economy." But let me explain for a moment what I mean by the "new economy." It is not a place or a specific industry segment. It is a pervasive concept affecting all industries to varying degrees. The NAM has done several reports, in fact, on "Technology on the Factory Floor." Traditional manufacturers are huge consumers of technology, whether it's to improve methods of cutting steel using laser-like streams of super-cooled chemicals; to locate oil, gas, or other natural resources; to automate an assembly line; or even to provide all of their employees with home computers. Such a dramatic evolution in the way our companies do business seems to warrant at least an examination of whether traditional accounting principles are still accurate and appropriate.

I have personally discussed the proposed elimination of pooling with many of our member companies, and I have been truly surprised by the number of times I've heard that this merger or that merger would not have happened had it not been for the applicability of pooling. And I've heard these comments across the board from all kinds of manufacturers. Even those that don't use pooling are very concerned about its possible unavailability for future transactions.

Manufacturing is the largest contributor to economic growth, and the recent surge in M&A activity has coincided with a surge in productivity growth. By mentioning these facts, I don't mean to suggest that pooling should be retained because it somehow "encourages" business combinations; rather, it appears that the existence of only the purchase method to account for a diverse array of transactions would discourage such activity - and that result could well have a negative effect on the economy.

III. Process

Finally, the NAM is concerned that the FASB is not hearing from all parties who may be critical of the project. Too often we have found that companies are very reluctant to too visibly criticize the merits of a FASB proposal due to concern that such activity might invite increased SEC scrutiny. Regardless of whether such concerns are founded, as they say, perception is reality, and it does have a chilling effect on full participation in the process. That said, the NAM appreciates the FASB's extensive efforts to thoroughly evaluate these issues with significant outside input and participation. We do fully support the FASB's independence and private-sector setting of accounting standards.

Thank you very much for the opportunity to participate in these proceedings today. I'll be happy to any questions.

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