Roundtable Meeting and Discussion of "Accounting for Goodwill"

Statement of Edmund L. Jenkins
Financial Accounting Standards Board

10:00 a.m., Wednesday, June 14, 2000

Mr. Chairman, Members of the Committee, and other roundtable participants, I am Edmund Jenkins, chairman of the Financial Accounting Standards Board ("FASB" or "Board"). With me is Kim Petrone, the project manager on the Board's project to improve the accounting for business combinations and intangible assets. I am pleased to be here today.

I am here mainly to listen to the discussion. I, however, have some brief prepared remarks, and I would respectfully request that my full statement and previously submitted supporting materials be entered into the official record.

The FASB is an independent private-sector organization that is funded entirely by the private sector. Our mission is to set accounting and reporting standards to protect the consumers of financial information—most notably, investors and creditors. Those consumers rely heavily on credible, transparent, and comparable financial information for effective participation in the capital markets.

Our decision-making process is thorough—it is open to public observation and provides numerous opportunities for all interested parties to actively participate in and express their views. The issues that the FASB addresses are necessarily difficult ones for which reasonable people can and do hold differing views. As all of you know, we have often made significant changes to our proposals in response to concerns raised.

The subject of this roundtable discussion is the accounting for goodwill. The current accounting for goodwill was established in 1970. That accounting requires that purchased goodwill be recognized as an asset and amortized on a straight-line basis over the lesser of its useful economic life or 40 years.

As you are aware, since 1996 the Board has been working to develop a new financial reporting standard to improve the accounting for business combinations and intangible assets. After nearly three years of public discussion and the issuance of two preliminary documents for public comment, the Board, in September 1999, issued an Exposure Draft, Business Combinations and Intangible Assets ("Proposal"), for public comment. With respect to the issue of goodwill, the Proposal would continue to require that goodwill be recognized as an asset and amortized over its useful economic life. The Proposal, however, would reduce the maximum amortization period of goodwill from 40 to 20 years. The Proposal would also require companies to present goodwill amortization as a separate line item on the income statement, preceded by a subtotal, to make the charge to earnings more transparent to investors and creditors.

The Board based its proposed requirements for the accounting for goodwill on a number of factors. The Board observed that the rapid pace of technological change was shortening product life cycles and requiring enterprises to reinvent themselves more regularly in order to survive. Although the Board acknowledges that some goodwill may actually appreciate in value, in general, the average useful economic life of goodwill has been diminishing since 1970. That observation was supported by evidence provided by companies, including those that participated in limited field tests. The Board also observed that in current practice the amortization period for goodwill used by many companies, including those in the technology industry and financial services industry, was generally less than 20 years.

The Board proposed that goodwill amortization should be presented as a separate line item on the income statement because goodwill is a unique asset, the useful life of which cannot be determined precisely. In addition, some investors and creditors often weigh goodwill amortization differently from other expenses in their financial analysis, and the proposed presentation would benefit those users.

Since first adding the project on business combinations to its agenda in 1996, the Board has held over 40 public meetings, issued 2 preliminary documents and the Proposal for public comment, and carefully analyzed and continues to discuss, at public meetings, over 400 comment letters received from a broad range of companies, investors, and other constituents. Many of those comment letters include constituent views on the accounting for goodwill, including letters from virtually all of the participants at this roundtable.

In February of this year, the Board held four days of public hearings to discuss the Proposal with interested constituents. Over 40 individuals testified, including several of the participants at this roundtable. Much of the discussion at those hearings involved the issue of accounting for goodwill.

In April, the Board began its redeliberations of all of the issues contained in the Proposal. The initial focus of the Board's redeliberations involves carefully evaluating all of the alternatives received from constituents about how goodwill should be accounted for.

The Board expects to discuss the various alternatives at no fewer than eight public Board meetings that will end no earlier than September. All of those meetings are open to the public and may be monitored by telephone.

The Board will not make a final decision about the Proposal, including the accounting for goodwill, or consider whether to issue a final standard until it has addressed all of the substantive issues raised by all constituents and has considered the entire set of tentative decisions reached during its redeliberations.

While the Board currently estimates that it will be able to complete its redeliberations by the end of 2000, that estimate may not be met depending on the progress of its redeliberations. The Board has no "deadline" for completing the project.

In conclusion, I want to again be clear that the FASB understands and supports the oversight role of this Committee. We will carefully consider what we learn from today's discussion. Let me again assure you, Mr. Chairman, Members of the Committee, and all of the participants at this roundtable, that the Board's open due process and independent and objective decision-making will be carefully and fully carried out. To do otherwise would jeopardize the very foundation upon which independent private sector accounting standard setting was created and for which it has proven invaluable to the unparalleled success and competitive advantage of the US capital markets and to investors and creditors—the consumers of financial information.

Thank you, Mr. Chairman.

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