Goodbye, goodwill

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"Everybody out of the pool" will have a very different meaning for ad agencies on June 30, when changes in accounting rules will alter the way they calculate and report financial results after an acquisition.

The Financial Accounting Standards Board, the regulatory trade group that oversees private-sector accounting, issued a final draft of its proposed new rules. The revisions to Generally Accepted Accounting Principles (GAAP) would eliminate the "pooling of interest" method of accounting for acquisitions and would not require companies to write off "goodwill"-the amount paid over the value of hard assets and a particularly important consideration in agency acquisitions, where the main assets acquired are personnel and accounts.

Good riddance, industry insiders said.

On July 1, all public companies will account for their results the same way; before, "based on the magic pencil, you'd get different results," said David Weiner, an accountant who specializes in the media and agency business.

He likened pooling to smashing two eggs together-both are in the pan afterwards, but it's impossible to tell which is which. With pooling, assets become one pool and any goodwill acquired is not accounted for in the balance sheet post-merger. In the purchase-accounting method, an acquisition is amortized over as long as 40 years, while the company takes regular charges to its earnings to write off goodwill. This affects the the company's quarterly per-share earnings.

LEVELING THE FIELD

Eliminating pooling and goodwill writeoffs will level the playing field among public firms and erase concerns about the values of companies in the real world vs. their book value, said Mr. Weiner. It actually will make it easier to evaluate the value of an acquisition to the combined company. "If you're a buyer, a seller or an investor, it makes it more transparent," said Mr. Weiner.

Goodwill is "an accounting fiction," said Jim Rutherfurd, exec VP of media merchant bank Veronis Suhler & Associates, New York. "When people buy businesses, they buy ongoing businesses, they buy brand names. ... To say it's worth what the real estate will sell for is ridiculous," he said.

"The only area in which it may have some impact is in the irrational obsession some people have with quarterly earnings reports," said Jim Dougherty, analyst with Prudential Securities. For example, Mr. Dougherty calculated Interpublic Group of Cos.' earnings would be up 30 cents per share due to the accounting difference. Interpublic recently used pooling for its acquisition of Deutsch, New York.

"We're in the middle of the big companies figuring out `what this means for us,"' said Abe Jones, managing director of investment bank Ad Media Partners, New York. He estimated some large transactions that would've used pooling may move through faster to beat the rule change. Mr. Rutherfurd said most agency acquisitions are strategic, so it may be easy for holding companies to explain the impact to investors.

FASB's comment period, during which the regulation will be available on its Web site, www.fasb.org, runs through March 16. FASB is expected to issue the final rule at the end of June, effective July 1.

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