Thank you, Mr. Chairman for holding this hearing today.
Let me begin by saying that I don't think Congress should be in the business of setting accounting standards. But I do think we have a responsibility to be concerned about the effect of government-mandated rules on the economy.
And FASB's proposal to eliminate pooling may pose a risk to economic growth. So I'm glad we have the opportunity to discuss it today.
Over the past year I've been hearing from accounting firms, publicly-traded companies, even Alan Greenspan that the traditional accounting framework doesn't work so well in a high tech economy.
This concern is of obvious importance to the accounting industry, where some are even questioning their entire business model --because while accountants provide a high degree of certainty that the numbers a company reports are accurate, they're increasingly finding that the numbers aren't all that useful for investors. That investors aren't getting most of their information from a prospectus. They're getting it from the Internet. They're getting it from friends.
One of the reasons I've heard that investors are looking to these alternative sources of information is that those numbers don't provide much meaningful information about companies on the front line of the Knowledge Economy. And purchase accounting makes the one figure that undoubtedly has real relevance for the retail investor -- the net income figure – useless by forcing knowledge-based companies rich in intangible assets into a framework that doesn't values those assets.
Here's an example. If Microsoft were forced to acquire Intel. The market value of Intel is $362 Billion. But it's tangible assets, its "book value" is a mere $26 billion. That means that Microsoft would have to absorb $336 billion –93% of Intel's value-- from the purchase. Earnings per share that are $2.32 for Intel and $1.51 for Microsoft would be negative after the acquisition.
Now most investors would see through it because these are two of the strongest companies in the tech world. But how could they appropriately value it? Do they have the skills to, even if equity analysts do? And most importantly, most investors would know that these numbers make no sense for Microsoft, but what about the smaller, lower profile companies whose earnings are distorted but no one bothers to figure it out? At some point will it be worth it for investors to try to even figure it out?
In trying to come up with a standardization that will allow investors to compare across companies, FASB would be creating a system that would distort entirely the value of knowledge companies.
So why do we want to take arguably the most important number – the net income number – and make it meaningless? Why do we want to apply Old World accounting standards to the New Knowledge Economy when everyone agrees that they don't make any sense?
Eliminating pooling is an enormous gamble because of the effect it could have on our highest growth sectors of our economy. Everyone agrees that there are problems with pooling. But do we want to throw out the baby with the bath water?
With this proposal, at best, we do no harm. And at worst, we have a chilling effect on the segment of the economy that has led the real productivity gains that have kept our economy strong and inflation low for the past decade.
I'm certainly not prepared to take that risk.
So I look forward to hearing testimony from FASB today that explains why purchase accounting makes sense for knowledge-based economies.