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* NEW FASB STANDARDS PROHIBIT the pooling-of-interests method of accounting for business combinations and require a purchase accounting method that does not allow goodwill amortization. The standards are a radical change, and management accountants, auditors and financial executives must understand and work with a very different accounting process.
* COMPANIES WILL BE REQUIRED TO CONDUCT an annual goodwill impairment test based on the fair value of the reporting unit using a two-step approach. Since only the purchase method can be applied, companies must recognize goodwill as an asset on financial statements and present it as a separate line item on the balance sheet.
* COMPANIES ARE NOT REQUIRED TO PERFORM the annual impairment test at the close of the fiscal year, but they must perform the initial step of the impairment test within the first six months after the beginning of their fiscal year. Additionally, they can perform the fair value measurement for each reporting unit at any time as long as one measurement date is used consistently from year to year.
* THE NEW STANDARD DOES NOT REQUIRE companies to test existing goodwill assets for impairment immediately on adoption of the standard unless an indicator of impairment exists at that date. However, companies must conduct a benchmark assessment within six months of adoption for all significant prior acquisitions, which will be the first determination of current goodwill value.
* THE NEW RULES HAVE IMPORTANT IMPLICATIONS for financial reporting. Combining companies will no longer worry about structuring a deal to comply with pooling requirements.
The effective date for eliminating pooling-of-interests accounting for business combinations is June 30, 2001; transactions entered into after that date must use the purchase method. The other provisions of Statement no. 141, including the recognition of identifiable intangible assets separately from goodwill and accounting for negative goodwill, are effective for any combination using the purchase method that is completed after June 30, 2001.
Statement no. 142 will be effective for fiscal years beginning after December 15, 2001. Early adoption is permitted for companies with a fiscal year beginning after March 15, 2001, provided that first-quarter financial statements have not already been issued. In all cases, Statement no. 142 must be adopted as of the beginning of a fiscal year.
Will FASB's new standards for business combinations cause big changes?
As of June 30, 2001, FASB changed the rules for the mergers and acquisitions game. Companies no longer may use the pooling-of-interests accounting method for business combinations. Nor will they account for mergers on their financial statements under the traditional purchase method, which required them to amortize goodwill assets over a specific time period. Instead purchased goodwill will remain on the balance sheet as an asset subject to impairment reviews. FASB's new standards, Statement no. 141, Accounting for Business Combinations, and Statement no. 142, Accounting for Goodwill and Intangible Assets, are a radical change, and now management accountants, auditors and financial executives must understand and work with a very different accounting process.
Some believe FASB eliminated amortization to make purchase accounting techniques more appealing to corporate America. Traditional purchase accounting required companies to amortize "purchased" goodwill on a periodic basis, for as long as 40 years. Now companies will be able to make acquisitions without being forced to take large periodic earnings write-downs, which some …