Pooling of interests will no longer be driving the bus

The Financial Times reports on one of the biggest changes to come along with the calendar change, the elimination of pooling of interests accounting in mergers and acquisitions. This accounting method allowed companies to to minimize the effect of so-called goodwill on their books by effectively treating the deals as mergers and not acquisitions. Goodwill, for the accounting-challenged, is the difference between the purchase price of a company and the book value; that is, if a company is being acquired for $100 million but has real assets of only $50 million, the acquiring company must book the goodwill for $50 million. For example, when Sun acquired NetDynamics (clearly a whale swallowing a minnow), Sun marked it up this way even though to any objective observer this was an acquisition and not a merger.

In deals not treated this way, companies had to charge off the goodwill against income over 40 years, thus reducing earnings and profits and looking not quite as good to Wall St. Fortunately, the accounting authorities also changed that aspect of their rules but I’m not as clear how the new standard will impact stock prices.