An accounting proposal that bankers feel could significantly dampen the future earnings of merged companies (See FMR 4/12/99, p.1) may, practically speaking, not be so bad after all.
The Financial Accounting Standards Board’s business combinations project is currently on path to limit the life of goodwill–the premium paid in an acquisition–to 10 years and not more than 20 under certain circumstances. Currently, the limit is 40 years for most companies and 25 years for banks, which means the goodwill would have to be amortized in most cases in less than half the time period, significantly increasing the hit to earnings and making the mergers appear less attractive for investors.
Investors, however, may not care about goodwill, after all. The first official sign of that arose last week when First Call Corp., which forecasts companies’ earnings, said it would emphasize earnings without goodwill adjustments for five high-tech companies and may do so for 15 more. Called “cash EPS,” the new number reflects technology analysts’ priorities, said Chuck Hill, director of research at First Call. He added that the number will be extended to other industries if there is investor demand.
Robert Willens, managing director and accounting expert at Lehman Brothers, said he thinks that is a likely outcome. “I don’t think there would be much opposition to it. Everybody wants to see higher earnings,” he said.
Practically speaking, Willens noted, a shift in investors’ priorities toward cash EPS would largely limit the relevance goodwill information to 10Ks and 10Qs, and leave earnings per share untouched. “You know that this is going to happen in the banking arena, where analysts are very attuned to this kind of thing.”