Navigant Restates Poolings of Interests For 1999 as Purchases
The Wall Street Journal - 01/25/2000
(Copyright (c) 2000, Dow Jones & Company, Inc.)
CHICAGO -- Navigant Consulting Inc. restated financial results for the first
nine months of 1999 to change the accounting treatment of four acquisitions.
Navigant, a Chicago management-consulting firm, recharacterized as purchases
acquisitions originally treated as poolings of interests. Purchase accounting
requires that an acquiring company record an intangible asset called "goodwill"
in an amount equal to the excess of the purchase price over the book value of
the acquired company. The goodwill then must be amortized over time as a noncash
charge against earnings.
In restated financial statements filed with the Securities Exchange
Commission yesterday, Navigant booked $203.5 million in goodwill in connection
with the 1999 acquisitions. Amortization of $16.5 million of the goodwill, along
with other adjustments, reduced net income for the nine month period to $26.5
million, or 61 cents per diluted share, from $43.8 million, or 98 cents per
share, reported previously.
Chief Financial Officer James Hillman said the remaining goodwill would be
amortized at a rate of about $8 million per quarter during a seven-year period.
Navigant was shaken last year by the disclosure that top executives bought
$17 million in company stock in the weeks before Navigant announced the hiring
of an investment banker to explore "strategic alternatives" including the
possible sale of the company.
Auditors for Navigant questioned whether the insider transactions
disqualified the acquisitions for pooling-of-interests treatment. The company
said a special committee of its board of directors appointed to investigate the
matter "instructed management to restate financial statements to account for
these acquisitions as purchases rather than poolings."
Navigant rose 1.375 cents to $11.3125 in New York Stock Exchange 4 p.m.
- What is the difference between pooling of interest and purchase accounting
methods for a business acquisition?
- According to Ray Beier and Richard Stewart (The
Pooling of Interests Regulatory Decision: Does It Influence Value?),
pooling "is an accounting method that treats a merger as the
combination of two businesses, rather than as one business acquiring
another. Effectively, it treats the two businesses as if they had grown up
together." Keeping this in mind, explain why the FASB has the
following restrictions on companies that opt for pooling:
- Selling businesses that don't fit is severely prohibited.
- Restructuring is curtailed, including asset dispositions, plant
close-downs, and spin-offs.
- Share buy-backs are minimized.
- Adjustments to enhance stock-option incentive plans are proscribed.
- Can you explain the Board of Directors' recommendation "to restate financial statements to account for
these acquisitions as purchases rather than poolings?" Under which of the
categories listed in the previous question, if any, would the insider
- Here's what FASB Chairman Edmund L. Jenkins said on Sept. 8, 1999:
- The pooling method provides investors with less information-and less
relevant information-than the purchase method.
- The pooling method ignores the values exchanged in a business combination,
while the purchase method reflects them.
- It is difficult for investors to compare companies when they have used
different methods of accounting for what is essentially the same
- Business combinations are acquisitions and should be accounted for as
such, based on the value of what is given up in exchange, regardless of
whether it is cash, other assets, debt, or equity shares.
- Because cash flows are the same no matter what accounting method is used,
the boost in earnings under the pooling method reflects artificial
accounting differences rather than real econ
Evaluate the validity of these points. You may be interested to know
that according to a study done by PriceWaterhouseCoopers, there is " no long-term
differencefrom the shareholders' point of viewwhether pooling or
purchase accounting is used."
- If the PriceWaterhouseCoopers study is correct, can you explain
why Navigant's stock price rose after the accounting change was announced?
- Now read this January 14, 2000 news item (http://biz.yahoo.com/bw/000114/ny_pomeran_2.html).
Would you change your mind about your answer to questions 3. and 5?