NEWS RELEASE 5/4/00
Chairman Jenkins Testifies at House Hearing
Washington, DC, May 4, 2000—"Comparable, relevant, reliable, and neutral financial information is the lifeblood of the U.S. capital markets," said Edmund L. Jenkins today in a statement to the House Subcommittee on Finance and Hazardous Materials. Mr. Jenkins is chairman of the Financial Accounting Standards Board, whose project on business combinations is the subject of a public hearing today in Washington.
"The unparalleled success and competitive advantage of the U.S. capital markets are due, in no small part, to the high-quality and continually improving U.S. financial accounting standards," Mr. Jenkins said. In setting those standards, Mr. Jenkins noted, "we attempt to ensure that corporate financial reports give consumers an informative picture of an enterprise's financial condition and activities and do not color the image to influence behavior in any particular direction."
Mr. Jenkins said that, "There are few areas of accounting that need improvement more than the accounting for business combinations. The current accounting literature allows two economically similar business combinations to be accounting for using different accounting methods that produce dramatically different financial results, which is confusing to investors."
The FASB has proposed eliminating one of those methods of accounting, called "pooling of interests," because it fails to acknowledge the true cost of a business combination. "In a pooling," Mr. Jenkins explained, "the book values of combining companies are merely added together without recognizing the actual price one company paid to acquire the other. The purchase method of accounting, on the other hand, reveals that real cost of the transaction and gives investors the valuable information they need to make investment and capital allocation decisions."
The Board has been studying the business combination issues for several years and issued its proposal last September. It received almost 200 comment letters on the proposal and heard from more than 40 individuals at its public hearings held in February. In April, the Board began redeliberating the issues at public Board meetings, based on what was learned from those letters and testimony.
"The FASB is all about protecting the consumers of financial information," Mr. Jenkins said. "Those consumers need credible, transparent, and comparable information for effective participation in our capital markets. The Board's job is to ensure that those consumers get the information they need."