GOODWILL ACCOUNTING: EVERYTHING HAS CHANGED AND NOTHING HAS CHANGED

In issuing Statements No. 141 and No. 142, the FASB has attempted to make accounting statements better reflect the economics of the exchange of value that takes place in business combinations. At the very least, requiring a single method of accounting reduces the costs of accounting, puts all acquirers on an equal accounting footing, and removes the incentive to incur significant costs to be able to report on a pooling‐of‐interests basis. But if the FASB rules have changed significantly, investors' expectations for acquiring companies have not. Therefore, accounting rules should have no impact on acquisition pricing or structuring unless they affect cash flows. Recorded goodwill and return on capital are the artificial result of accounting rules, and largely without economic content. However, understanding the growth value implicit in the price paid is key to helping ensure that acquisitions create value. Boards of directors and executives must understand the minimum annual performance targets they have set for themselves by paying a premium to acquire a company. The ideal measure of goodwill, which has not been contemplated by the FASB, would capture the premium of the current acquisition price over the value of the target firm's current operating value—that is, the discounted NPV of its current operating cash flows. Using such an economist's definition of goodwill, financial analysts could then come up with the variable that is of greatest interest to investors‐namely, the expected improvements in operating performance that are necessary to justify the acquirer's investment in the target company. The economic framework and future growth value analysis based on EVA can be used to answer this question, regardless of the accounting rules du jour.