The US Accounting Standards Board recently announced that it would abolish the principle of ‘pooling of interests’ in relation to the accounting treatment of M&A deals in order to stop abuses.
UK accounting standards that deal with mergers and acquisitions according to similar guidelines are considered to be under threat following the recent global adoption of practices and standards that originated in the US, such as FAS 133 on hedge accounting.
Dr Nigel Sleigh-Johnson, manager of financial reporting for the Institute of Chartered Accountants in England and Wales, said: ‘In the UK, FRS 6 and FRS 7 for mergers and acquisitions are generally robust and work efficiently. Although true mergers are rare, it does not follow that the use of merger accounting should be prohibited in the UK.’
Ken Wild, technical partner at Deloitte and Touche and a member of the Accounting Standards Board, said: ‘The US Accounting Standards Board decided to abolish merger accounting as the line between merger and acquisition was too difficult to draw, thus leading to abuse.’
Robust distinction between acquisition and merger
At present, merger accounting can be used only when certain conditions are met. It means that there is no goodwill or fair value adjustment to be calculated because there is supposed to be a true merger of equals. In which case, the parties are treated as if they have always been part of the same group, which means that there is no goodwill adjustment to be calculated. The abuse observed in the US saw the majority of corporates using ‘pooling of interests’ standards for acquisitions as well as ‘true’ mergers.
In the UK, companies mostly use acquisition accounting. Although on specific occasions, some use merger accounting standards similar to the US concept of ‘pooling of interests’. The two standards, FRS 6 and FRS 7, were established in 1984 and specialists agree that they kept abuse to a minimum in the UK.
Paul Ginman, secretary of global accounting service provider Summit International Associates Inc, commented: ‘The disappearance of merger accounting in the UK could generate problems for companies in the process of restructuring.’
IASB likely to favour the US model
The IASB chairman, Sir David Tweedie, has recently announced his intentions to toughen up international standards dealing with business combinations. But Sleigh-Johnson says the issue needs to be debated further in the UK.
‘Although the ICAEW did not support the 1998 G4+1 consultation paper’s preference for the abolition of merger accounting, we strongly support moves towards international harmonisation and co-operation.’
According to Sleigh-Johnson, the merits of the UK’s existing approach to acquisition and merger accounting should nevertheless be considered by the international accounting standards setters before a decision is made on the reform of international standards.
However, Deloitte and Touche’s Wild was more pessimistic: ‘Realistically, the cost for the UK to adjust to US accounting standards for mergers and acquisitions will be less for international harmonisation than that of the US changing to UK standards. However, for the UK, it is the loss of a genuine efficient accounting technique.’