Roundtable Meeting and Discussion of "Accounting for Goodwill"

Statement of

Dr. T.J. Rodgers
President & CEO
Cypress Semiconductor Corporation
San Jose, California

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

The Financial Accounting Standards Board (FASB) has long favored eliminating the pooling-of-interests accounting treatment (pooling accounting) in favor of purchase accounting treatment. The issue driving the debate on pooling vs. purchase accounting is so-called goodwill, defined to be the difference between the market capitalization of a corporation, the value of all its outstanding shares, and the assets of the corporation, including the value of the corporation's buildings, equipment and other valued property. In other words, goodwill is the added value ascribed to a company by its shareholders, above its hard asset value, to reflect that a company has more value than just its assets.

In a pooling accounting treatment of a merger or acquisition, the constituent companies are added together financially: total merged sales, profits, assets, etc. are simply the sum of those of the two companies. And on the day of the acquisition, the goodwill value of the companies is, in effect, also added together. Unlike the other financial parameters, goodwill value-for each of the companies before the merger, and for the combined company after the merger-is set by the shareholders, not by the direct action of the company or according to any accounting rules.

In purchase accounting treatment of an acquisition, the goodwill value of the acquired company is treated like a tangible asset, which loses value over time and is amortized (written off) against earnings. Current SEC practice allows without comment the use of a five-year goodwill amortization period; however, the SEC routinely challenges very short periods ("No, you will not dump this goodwill problem and get it behind you.") and very long periods ("No, you will not spread out the charge over a time frame long enough to make it inconsequential on a quarterly basis.")

Purchase accounting, the FASB-favored method, treats the goodwill of an acquired company identically to the depreciation of a piece of manufacturing equipment that wears out in five years. To equate the goodwill of a company-the intangible value of its employees, technology and success-to the wearing out of a piece of manufacturing equipment is ludicrously wrong. We would not have taken the effort to be here in Washington today if this proposed accounting foible weren't also very harmful to Silicon Valley, for reasons I will explain.

This testimony, makes six major points in bold type, with bullet points to support each of them.

Pooling-of-interests accounting is accurate and preferred by investors. We should maintain its use, even if that requires congressional intervention. FASB's attempt to eliminate pooling accounting will cause significant harm to high-technology companies with no tangible benefit to anyone. Purchase accounting treats people and intellectual property like machines by depreciating them-just when the information economy is proving that the opposite trend is the course for the 21st century.

FASB's logic on the issue of eliminating pooling is massively flawed as shown by my common English translation of quotes from FASB Chairman Edmund L. Jenkins' Senate testimony, dated June 14, 2000.

How can anyone reasonably claim that the purchase accounting method, with its severe distortions, more accurately reflects the reality of this merger than does the pooling method?

Even if FASB is allowed to force this ill-conceived accounting change on business, the market will ignore the edict, leading to ad hoc accounting rules.

If FASB were allowed to destroy pooling accounting it would wipe out a significant fraction of the value of many Silicon Valley companies and harm the venture capital industry that supports them-directly contrary to the spirit of the Fourth Amendment.

Pooling of interests is the proper way to account for mergers and acquisitions.

Free markets work; let's use them on goodwill, and on FASB.

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