Benjamin Titera and Dr. Earl Kay Stice, Accounting and Information Systems
FASB Statements No. 141&142 concern the proper accounting for business combinations, intangible assets, and goodwill. Since the implementation of these standards had the potential to greatly influence business transactions, my research was designed to target the manner in which U.S. business executives perceive the impact of these Statements.
For a brief overview, the issue of purchase vs. pooling has been highly controversial in the accounting arena. The most visible difference between the two is that in a purchase transaction, assets are recorded at market value, as opposed to book value, at the time of the transaction. Therefore, since market value is generally greater than book value, the increase in the recorded value of the assets (including goodwill) results in increased annual depreciation costs. These costs then result in lower reported earnings in the following years when compared to those of a pooling transaction.
Since June 30, 2001, FASB Statements No. 141&142 have been effective relative to accounting for business combinations, intangible assets, and goodwill. Prior to this date, business combinations were accounted for using one of two methods, the pooling-of-interests method (pooling method) or the purchase method. Statements No. 141&142, therefore, could significantly impact mergers and acquisition (M&A) decisions.
My hypothesis was that accounting is more than the passive way the score is kept—accounting influences the way the game is played. I had thought that perhaps in a perfect world, Statements No.141 &142 would simply redefine the way for completing different reports; however, I recognized that based on business executives’ perception of these rules, Statements No.141 &142 could actually redefine the way business is done. This perception is what I set out to ascertain and found my conclusions upon.
I felt that I could accomplish this objective by pursuing a two-fold plan of attack. Firstly, I wanted to research the theorist perspectives. Then, I wanted to utilize all that I had learned for conducting front-line interviews.
My efforts to develop an understanding of the related issues through researching the theorist perspectives proved to be invaluable. I started my research by learning what the standard setters had to say through studying Statements No.141&142, FASB Press releases, and related SEC Viewpoints.
After I had developed a foundation of information, I tried to understand what the business world had to say through studying related articles in The Wall Street Journal, Forbes, Business Week, and other similar sources. Researching these theoretical perspectives helped qualify and prepare me for the front-line interviews.
I had hoped to find a common consensus in the business community through interviewing top executives from some of the leading investment banks, public accounting firms, fortune 500 companies, and others. I had anticipated the difficulty of securing these interviews; however, with persistence, I was able to largely overcome this hurdle.
What I did not fully anticipate was how different their responses would be. Despite the fact that the vast majority of the interviewees were intimately acquainted with Statements No.141&142 through their dealings with M&A decisions, their perceptions varied as much as the people themselves. Therefore, due to a lack of consistency, my front-line interviews proved to be inconclusive.
My studies helped me understand that the intended purpose of changing to the purchase method was to improve the quality of the financial statements. Theoretically, the application of Statements No.141 &142 in financial reporting would better reflect the investment made in an acquired entity, improve the comparability of reported financial information, and provide more complete financial information. However, as stated earlier, since this financial information in the purchase method is presented differently from the pooling-of-interests method, Statements No. 141&142 could significantly impact mergers and acquisition (M&A) decisions.
Overall, due to tragic events of September 11th and the universal downturn of our nation’s economy, M&A activity has been severely handicapped. Many potential growth opportunities through joint-venture projects have fallen in priority as companies struggle with day to day operations. Consequently, as executives attention has been diverted more towards survival as opposed to growth, my ability to research the perceived impact of said standards has been somewhat hampered.
However, these conditions actually provided the basis for my overall conclusion. With plummeting stock prices and record lows in the market place, M&A activity did not entirely cease. Several somewhat opportunistic bargain buyers have emerged to capitalize on the significantly lower prices available in today’s market.
Their M&A decisions are not based on the reported earnings or the quality of a company’s financial statements. Their decisions are primarily driven by perceived value and earning potential. The rules have changed—but that change did not actually affect the game. That is to say, ultimately, despite the differences between the pooling and purchase methods of accounting for business combinations and the rules surrounding them, competition in markets for mergers and acquisitions seems to be principally driven by factors other than accounting standards.
I would like to thank ORCA for funding this project, Dr Earl Kay Stice, my advisor, and the many executives who cooperated with the interviews. The knowledge I have acquired from this study has opened many doors in my professional tract and has opened my eyes to the beauty of research. I am very thankful for the opportunities this research project has provided me regarding my future in the accounting profession.