|FOR IMMEDIATE RELEASE:||CONTACT: CHRISTI HARLAN|
|Thursday, March 2, 2000||202-224-0894|
Sen. Phil Gramm, chairman of the Senate Committee on Banking, Housing and Urban Affairs, made the following statement today at a full committee hearing on a proposal from the Financial Accounting Standards Board to eliminate the "pooling of interests" method of accounting for corporate mergers:
"I'd like to begin by giving my take on this problem and to express some concerns, and then hear from the victims – or the people who are affected. Then we're going to hear from Ed Jenkins from FASB.
"As I look at accounting, no one could ever make a claim that accounting is reality. No one could ever make a claim that accounting is based on precise theory where we reduce a very complex reality down into a balance sheet that perfectly reflects it.
"The goal of accounting is basically to come up with simplifications that reflect reality and, to the extent that any simplifications ever reflect a complex reality, produce a situation in which you can get a good view of what is actually happening to a firm in the marketplace from the accounting standards that were set.
"We are in a situation where we have a very controversial proposal that has been made by FASB, which would eliminate the ability of companies under certain conditions to choose between two different systems of accounting when one company acquires another or when there is a merger.
"I would have to say that seldom is there any true merger. Generally, there is an acquirer. Most people who work for a company that is acquired would understand the difference.
"Here is my problem: In the era we live in, a lot of the value of a company is its established position in the marketplace, its access to consumers, its ability to attract quality employees – something that's called goodwill. This is unlike the old days where you had a lot of bricks and mortar and machines, and so when one company acquired another, you had a fairly good view of the joint value of the two companies by simply adding up all those machines and counting the bricks.
"The problem as I see it with purchase accounting, and the reason that companies generally don't like it, is it requires you to do something that does not comport with reality and that is, it requires you to write off goodwill.
"Goodwill can grow, goodwill can decline, but I don't see any immutable law of economics that says that goodwill has to decline. In fact, I would guess, that in most well-run companies in periods of economic expansion, that the value of a franchise, the value of a name, the value of a position in the marketplace, in fact grows rather than declines.
"I think that's the problem with purchase accounting. It has a fundamental assumption that is invalid. Not only is it invalid, but we're in the process of moving from forcing you to write off goodwill over 40 years to forcing you to write it off over 20 years.
"With all the skill that comes from having taken two basic classes in accounting and having talked with two small businessmen – Dicky Flatt from Mexia, Texas, and Warren Buffett from Omaha – let me give you my take.
"It seems to me that there ought to be a way, when one company acquires another, to allow the company that is acquiring take the purchase price, whatever difference that is compared to the real physical assets that are acquired, and book that as goodwill.
"We should then set up a systematic review process over time where that goodwill is evaluated, and if it diminishes, force the company to write it off. It seems to me that that would be a much better window on the real world than what we're talking about here.
"My concern is that I don't want accounting standards to color economic reality. I want them to reinforce economic reality.
"Finally, there is nobody more committed to the independent setting of accounting standards than I am. But I continually question the independence of the setting of these standards. I think the Securities and Exchange Commission has too much to do with the setting of these standards.
"I note that among the three reasons that are given by FASB in proposing these changes, one of the reasons is that the SEC has urged this change because it is having to commit staff time to review whether companies should be pre-qualified for the pooling method of accounting.
"It seems to me that is a very poor reason to be making accounting changes. The last thing on earth we need is to have this thing driven by a concern about a government agency and whether there is a demand on its people's time to make decisions.
"A second reason that is given is that supposedly this is a move toward harmonizing international accounting standards. Maybe that's so, but I think there's a heavy burden of proof on people who say that this is a movement toward harmonizing those standards. As I look at how the Germans, for example, treat mergers and acquisitions, we're certainly not harmonizing with them.
"This is a very important issue. I want to be sure that all views are heard, and that's why I decided to call this hearing."