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Acquisitions pose greater risk to earnings under new accounting rule Print E-mail
Tuesday, 17 November 2009

By Ronald Fink

A new accounting standard that expands the definition of a business will result in more goodwill impairments and charges to earnings, a panel of experts predicted on Monday.

Under the new accounting standard, which is called SFAS 141R and takes effect this year, an integrated set of activities may be considered a business even if it has no revenue. Under the previous rule, the acquisition of such a set of activities would not have required its treatment as a separate business.

"The definition of a business is a lot broader than it used to be," said the panel's moderator, Pascal Desroches, senior vice president and controller of Time Warner, during a discussion of the accounting rule at Financial Executives International's annual financial reporting conference in New York City on Monday.

The panelists cited the example of an operating unit that conducts development activities. Its assets might include management, design engineers and a business plan to develop technology into a viable product, along with the facilities, equipment and intellectual property related to that technology.

Among the most dramatic effects of treating such a unit as a business for accounting purposes is that goodwill associated with those activities will now have to be allocated to the business and tested for impairment, said panelist Amy Ripepi, a managing director of the Chicago-based accounting consultancy Financial Reporting Advisors. Any amounts of impaired goodwill must be charged against companies' earnings.

Under the previous standard, goodwill stemming from the assets' acquisition would have been included in that of other operating segments. And so long as those segments had significant cash flow, Ripepi noted, the goodwill associated with the acquired assets would not likely result in impairment.

But now that such an acquisition must be accounted for on a standalone basis, with goodwill allocated to it and tested for impairment, its lack of cash flow will result in acquirers facing charges to earnings they previously would not have faced.

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