[full article at http://www.iht.com/IHT/TODAY/THU/FIN/rules.2.html ] Paris, Thursday, September 21, 2000 New Accounting Rules For the New Economy? Changing U.S. Business Climate Spurs Shift By Albert B. Crenshaw Washington Post Service WASHINGTON - A clash of cultures has set off a heated debate among U.S. accountants, technology firms, Wall Street analysts and even old-economy industries over concerns of proposed changes in accounting rules. The disputes cover issues ranging from mergers to stock options to revenue recognition, with technology firms arguing that wrong or inappropriate rules could derail one of the major engines of U.S. economic growth. Many technology specialists say the accounting rules that applied in an industrial economy are out of date in today's fast-paced marketplace and need to be changed. But they say the accounting hierarchy is not listening to their concerns. They cite the Financial Accounting Standards Board, the private group that writes the rules, and especially the board's Emerging Issues Task Force, which studies new problems and recommends solutions. ''Generally among those in the tech community, '' said Mark Gitenstein, a Washington attorney with a number of high-tech clients, ''there is worry about where accounting policy is moving,'' particularly with respect to intellectual property, such as computer programs, and other intangible assets. Some of the efforts to adapt rules to what high-tech companies are doing have alarmed old-economy companies, either because they, too, are moving into high technology or because the proposed rule changes have implications for the way they have traditionally accounted for parts of their business. ''These are no longer just new-economy issues,'' said Paul Brownell of the National Venture Capital Association in Arlington, Virginia. The distinction between the new and old economy is quickly blurring.'' Even steadfast old-economy companies have reason to be concerned. For example, a rule on accounting for shipping and handling costs that might be appropriate for makers of computer disk drives could have unexpected ramifications for makers of giant steam turbines. The accounting standards board and the task force are looking at more than a dozen issues applicable to technology companies, but most of the issues stem from two practices that these companies have pushed to levels all but unknown in the past: - The use of stock as currency for both corporate acquisitions and employee compensation. Manipulation of income and expense items, especially by companies that have little or no profit and thus are often valued by analysts on the basis of sales or revenue. The top issue for high-tech companies remains the ''pooling of interests'' treatment of merger deals - a stock-as-currency dispute. Under current U.S. rules, if a company complies with certain requirements in purchasing another company for stock, it is allowed to simply add the book value of the acquired company's assets to its own and disregard any additional costs of the transaction. This is called a pooling-of-interests transaction. The accounting standards board has proposed to eliminate this device and instead require ''purchase accounting'' in mergers: Any amount the acquirer paid beyond the book value of the target company would be considered goodwill and would have to be placed on the books of the acquirer and written off over a period of years. In effect, such write-offs would be subtracted from earnings, creating a substantial drag on profit for years. This rule, if adopted, would all but end high-tech mergers, where acquisitions for stock are common and where much of the acquired companies' assets are intangible and thus would have to be written off. The real issue, technology companies say, is that accounting for intangibles is out of date and needs to be overhauled. If intangibles were properly valued, the problem would be manageable, but so far the accounting standards board has not undertaken such a fundamental review, they say. Meanwhile, the technology industry has launched a wide-ranging lobbying campaign to try to persuade the standards board to back off. ''Pooling remains A-1 for us'' among current issues in accounting, said Mr. Brownell. Also high on the list is the treatment of stock options. Currently, U.S. companies may include the cost of options granted to employees as a footnote to their financial statements, and most do. Critics say this conceals the true cost and presents a misleading picture to shareholders. Options allow the purchase of stock at a certain price. That may or may not be the market price when the option is granted, but the assumption is that the share price will have risen by the time the option is exercised. For example, an option granted at a share price of $50 is a big benefit if the share price goes to $100 But when the share price goes to $10, which is something that has happened to many companies, especially in the dot-com world, the option is worthless. Companies eager to retain employees have been repricing their options to restore at least some of the value. The repricing has no immediate impact, but if the stock starts to rise again, the increase must be reported as an expense. So if the $50 options are repriced at $10 - the current stock price - and then the stock rises to $20, the company must record an expense of $10 a share. Companies complain that the arrangement has the potential to yank their reported earnings all over the place. Finally, the task force is working on recommendations for a range of revenue-recognition issues. ''Those kind of came up,'' said the task force's chairman, Timothy Lucas, ''because of the Securities and Exchange Commission's concern about how some of the common practices were being implemented'' by technology companies. But as the task force has worked on them, he added, it has heard at least as much from old-line companies, fearful that their long-established ways of accounting will be upset. These issues include the way shipping and handling charges are recorded, how to book transactions in which companies exchange rights to place advertising on each others' Web sites, the treatment of rebates and discounts and accounting for ''arrangements that include the right to use software stored on another entity's hardware.'' Most of these issues have no effect on a company's bottom line, but investors in start-ups and other new-economy companies are interested in whether a firm is growing and building a market. ''How companies recognize revenue for the goods and services they offer has become an increasingly important issue,'' the task force noted recently, ''because investors appear to value the stock of certain companies based on a multiple of gross revenues rather than a multiple of gross profit or earnings.'' Both old-economy and new-economy companies have been unhappy with both the task force's conclusions and the way it reached them. ''One of the things that are bothering them is the process,'' said John Dirks, co-leader of accounting consulting services for PricewaterhouseCoopers, because the task force doesn't follow ''the typical due process'' used by the standards board and others. Companies may ''find out after the fact'' about something they didn't watch closely, Mr. Dirks said. For example, the task force reached a conclusion on shipping and handling charges, as well as discounts and coupons, ''then everybody got up in arms.'' Mr. Lucas said the task force often discussed the fact that ''the rules have tended to get more prescriptive over time.'' He called this a ''lamentable trend'' but said it was driven by events.
