June 24, 2002

 

Ms. Suzanne Bielstein
Director of Major Projects & Technical Activities
Financial Accounting Standards Board
401 Merritt 7
Post Office Box 5116
Norwalk, Connecticut 06856-5116

 

Re: File Reference No. 1019-002 Acquisitions of Certain Financial Institutions

 

Dear Ms. Bielstein:

 

The Financial Accounting Policy Committee (FAPC) of the Association for Investment Management and Research (AIMR)¹ is pleased to comment on the Financial Accounting Standards Board's (FASB) Exposure Draft, Proposed Statement of Financial Accounting Standards - Acquisitions of Certain Financial Institutions. The FAPC is a standing committee of AIMR charged with maintaining liaison with standard setters who develop financial accounting standards and regulate financial statement disclosures and responding to new regulatory initiatives. The FAPC also maintains contact with professional, academic, and other organizations interested in financial reporting.

 

General Comments

 

We support the Board's decision to centralize the standards relating to the treatment of Business Combinations and Accounting for Goodwill and Other Intangible Assets under FASB Statements No. 141 and No. 142 respectively. We therefore concur with the Board's decision to eliminate the industry-specific guidance provided in Statement 72 and Interpretation 9. We feel that acquisitions involving financial institutions should be treated in a manner similar to other acquisitions pursuant to FASB Statements 141 and 142. However, the FAPC's support of the Board's proposed accounting for goodwill arising from an unidentifiable excess of the fair value of liabilities assumed over the fair value of assets acquired is qualified. Please refer to our comments below.

 

Specific Comments

 

Issue 1: Statement 72
Separate recognition of identifiable depositor, borrower, and credit-cardholder intangibles may result in the recognition of minimal amounts of goodwill. However, we believe strongly that SFAS 72 goodwill should be tested for impairment on the earlier of SFAS 142 application date or the effective date of this Statement. We have previously expressed our concerns about whether the subsequent impairment test will be applied appropriately and in a timely manner. Please refer to our letter of March 16, 2001 on Accounting for Goodwill in which we state:

 

"Because of the subjectivity in the proposed impairment tests, we are not convinced that impairment losses will be reported pursuant to the proposed standard in a timely manner and reflect appropriately the amount of the loss relative to the value of acquired goodwill. Consequently, we believe it is essential to have transparency of the methodology and assumptions used for determining the reporting units, allocation of goodwill, and impairment test. This transparency is necessary on the acquisition date, during the period leading up to the announcement of the impairment, the period in which the impairment is recognized, and in subsequent periods if the entity continues to carry goodwill."

 

Issue 2: Interpretation 9
We agree and support the Board's decision to remove the industry specific guidance contained in Interpretation 9 and to subject financial institutions to the same standards as other enterprises in accounting for a business combination.

 

We do not believe that Statement 141 provides sufficient guidance. In the case where acquired liabilities exceed acquired assets, it is especially important to understand the reason for the transaction and the reasons why goodwill is thought to exist. Reiterating our comments related to Statement 141 and intangible assets in general, the FAPC recommends that the FASB provide a clear definition of intangibles and provide detailed guidance on disclosure. Please refer to our letter of October 5, 2001, regarding Intangible Assets, in which we state:

 

It is not clear under the current definition what would be included in intangibles and we are concerned about the possible omission of the items that would not be recognized separately from goodwill under Statement 141, such as a customer base or workforce value. Under the purchase method of accounting in business combinations, these would not be captured but would likely be buried under the residual of goodwill. The FAPC proposes that at a minimum intangibles be classified by the following characteristics:

a. Identifiability
b. Separability/transferability
c. Legal standing or contractual basis
d. Linkage to future sources of value, including cash flows from revenues as well as reduction in expenses.

 

Issue 3 & 4: Effective Date and Transition
We agree with the Board's decision to reclassify unidentifiable intangible assets that meet certain criteria to goodwill and adjust the previously recognized goodwill for any impairment loss. However, we strongly believe that any reclassified SFAS 72 goodwill should be tested for impairment on the earlier of SFAS 142 application date or the effective date of this Statement.

 

Concluding Remarks

 

The Financial Accounting Policy Committee appreciates the opportunity to express its views on the Board's Exposure Draft: Acquisitions of Certain Financial Institutions and Amendment of FASB Statement No. 72 and No. 144 and FASB Interpretation No. 9. If you, the Board, or your staff have questions or seek amplification of our views, please contact Nazir Rahemtulla at 1-434-951-5337 or at nazir.rahemtulla@cfainstitute.org. We would be pleased to answer any questions or provide additional information you might request.

 

Respectfully yours,

 

Ashwinpaul C. Sondhi, Ph.D. Chair, Financial Accounting Policy Committee

Nazir S. Rahemtulla, CFA Associate, Advocacy AIMR

 

¹ With headquarters in Charlottesville, VA, and regional offices in Hong Kong and London, the Association for Investment Management and Research© is a non-profit professional organization of 57,000 financial analysts, portfolio managers, and other investment professionals in 107 countries of which 44,800 are holders of the Chartered Financial Analyst© (CFA©) designation. AIMR's membership also includes 106 affiliated societies and chapters in 29 countries. AIMR is internationally renowned for its rigorous CFA curriculum and examination program, which has more than 100,000 candidates from 143 nations enrolled for the June 2002 exam.