The fate of the pooling method of accounting, the favored approach in the mergers of banks using their high stock prices as acquisition currency, will start to be addressed April 21 by the Financial Accounting Standards Board, which may do away with it altogether.

FASB will be looking at either eliminating or, at best, restricting its use, according to Kim Petrone, a FASB project manager. Such a move could dramatically affect the ongoing consolidation of the banking industry. And, in fact, banks have been some of the most vocal opponents of the proposal to date, which until recently has focused on accounting for goodwill, an integral part of the project.

In the most recent outburst of criticism, eight banks–including Chase, Citibank, KeyCorp, First Union and Bank One–and five banking trade groups submitted comments on a position paper to account for mergers by the G4+1, a consortium of international accounting standard setters. The paper is relevant because part of FASB’s goal in the business combinations project is to harmonize accounting standards internationally, and because it advocates eliminating the pooling method of accounting. FASB will be considering the paper and the comments in its deliberations.

The American Bankers Association, which has objected to most of the major accounting changes proposed recently by FASB, states high up in its comment letter that both the pooling and purchase methods of accounting should be retained. That’s in part because the "pooling method better reflects the long-term interests of shareholders and the long-term contribution of each (merged) entity to the performance of the combined entity than the purchase method," it says.

Bonnie Zoccola, vice president of accounting policy at First Tennessee, which greatly expanded its mortgage lending operations in recent years through acquisitions, tied the possible elimination of pooling more closely to banks.

"Purchase accounting is prohibitive especially in the banking industry because of the intangibles created–intangibles reduce capital on a one-to-one basis," he said.

A number of companies, largely excluding banks, have expressed reserved support for the business combinations project as long as accounting for goodwill is rejiggered to simplify and standardize it. FASB just finished addressing how to determine the measurement and life span of goodwill and intangible assets–tentatively deciding to limit the life span of goodwill to 10 years with a maximum of 20 years, down from the current 25 years for banks–and concluded that it must reconsider its deliberations later. The current version of the proposal would significantly increase merging banks’ amortization costs.

"Higher amortization would be prohibitive (for mergers). A couple of large banks have done mergers on a cash basis of accounting instead of accrual, and it’s been a bumpy ride," Zoccola said.

The comment letters did provide FASB with some alternatives to make goodwill less burdensome. Although he was averse to eliminating pooling, Princeton, N.J.-based Summit Bank’s comptroller Paul V. Stablin noted in his bank’s comment letter that treating goodwill as a one-time acquisition expense, or amortizing it into comprehensive income, would make the purchase method of accounting more attractive.

Not all bankers oppose eliminating the pooling method of accounting. Craig Dabroski, accounting specialist at America’s Community Bankers, said, "Several of our members would not be upset with purchase accounting, depending on how to measure goodwill."

He added that while he ultimately sees "a train down the track that’s going to intercept goodwill," the biggest problem today with purchase accounting is the ambiguity measuring goodwill and intangible assets.

"Now it’s very difficult to come up with, for example, fair value for core deposit intangibles," he said. He noted that another controversial FASB project dealing with accounting for all financial instruments at fair value, while now scheduled to be finished long after the business combinations project, would ultimately answer a number of questions.