Accounting Observer > Public Blog - Mail Call: Biz Com Proposal

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Mail Call: Biz Com Proposal

Location: Blogs AAO Weblog (Public)
Posted by: Jack Ciesielski	10/31/2005 7:58 AM
This note, from a friend in Boston, on my comment letter on FASB's proposal on cleaning up business combination accounting to make it report transaction fair values more effectively: "Jack, I agree with your comments on bizcom with the exception of pre-deal costs. You say that these costs do not generate returns. I agree, but management better generate returns on them - I gave them the capital! If you bought a house for $100 and incurred transaction costs of $3 and then sold the house later on for $103, did you make $3 or $0 of profit? The other analogy often offered is that when I do an envirormental study for a steel mill (the cost of entry), that is capitalized - why is the buy vs build decision different?" I think there are more benefits for investors in the proposed accounting than under current practice. A few reasons: One, as I said, the payments to the bankers, accountants, lawyers, etc. only allow access to the assets. They do not generate the returns. If management is going to spend my money to employ these guys, I want to know how much and I want to know now so I can criticize while it's closer to the time when they're spending my money - when I have more of a chance to affect their decisions than if I have to wait a couple years for a goodwill writedown while they get paid plenty for managing my company. (And after a goodwill writedown, I still wouldn't know how much of any goodwill writedown really was related to transaction costs.) Two, as I said, I sincerely believe these payments are of little future value, they are transaction costs. Putting sunshine on transaction costs has a way of making managers manage such costs. Putting it in current earnings makes them worry more about managing resources, I think, especially in context of making the numbers. Giving them a place to bury costs on the balance sheet encourages sloth. Three, the FASB is serious about a fair value presentation of the balance sheet wherever possible. Excluding the transaction costs puts ONLY the fair value of the assets/liabilities on the balance sheet. Adding the transaction costs dilutes the meaning of the assets immediately. In an income tax reporting model, I'd sure want to report the transaction costs as part of the basis in figuring a gain - unless I could deduct them earlier, before I sold the house. I can't do that for taxes, but I think it makes sense in GAAP. I admitted in my letter that this is at odds with other treatments - inventory , and securities being two examples - but I think that either of those methods do not accurately reflect fair values. Analogies are often helpful, but I don't think this is analogizing to a good model. Fair value is not something we're going to have to pick and choose - I think we have to be consistent in applying it. I'd hope the FASB looks at other "capped" costs down the road.

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