Volume 4, No. 10

 

Evaporating Acquisitions: How GAAP Can Make Whole Companies Disappear:  Purchase accounting for acquired companies often creates significant amounts of goodwill on the balance sheet of the acquiring firm. This is not so in many U.S. technology-oriented companies, for they avail themselves to a beneficial accounting rule that results in a bias away from recognizing goodwill. Consequently, application of this rule - the expensing of "purchased research & development" - vaporizes most of the acquirers' accounting basis in the companies they purchase. Much like the restructuring charges that have been part of the investment landscape in the last decade, this accounting treatment tends to understate assets and equity and to make return on equity seem more robust than it really is. Rather than simply forgiving such "one-time charges", analysts should take into account all of the implications of such accounting treatments.

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