VC Community Appeals to Congress, Accounting Method at Risk –

WASHINGTON, D.C. – The Commerce Committee’s Subcommittee on Finance and Hazardous Materials in the House of Representatives heard arguments in early May on the Financial Accounting Standards Board’s proposal to eliminate pooling, a longstanding accounting method on which venture capitalists have counted when merging and acquiring portfolio companies.

The accounting board seeks to eliminate pooling – a method by which two companies combine their balance sheets – leaving the purchase system as the one remaining alternative. Pooling, the board argues, is misleading to investors because it hides the terms of the deal and keeps the purchaser from having to put the acquired company’s goodwill – or intangible assets – on the buyer’s books and amortize it over time. The purchase method, however, forces one company to assume the role of acquirer, making it easier for investors to see which company was bought and for how much.

“The board believes that having two methods of transactions that produce such different financial results for similar transactions is not appropriate,” said Kim Petrone, a project manager at the Financial Accounting Standards Board.

The accounting organization also has long been in favor of “international harmonization,” whereby all countries have the same accounting rules, using it as an argument against pooling.

“The idea that we should harmonize with Europe rather than Europe harmonizing with us is ludicrous,” said Mark Heesen, president of the National Venture Capital Association. The policy could stop the continuation of progress VCs have been having over the last couple of years, Heesen said.

The venture capital community defends the pooling method of accounting arguing that the volume of high-tech and early-stage companies – entities whose value are often based in large part on intangible assets – involved in mergers and acquisitions, suggests that the purchase method, as it currently stands, is not a viable alternative.

“Pooling is a legal accounting method that should be retained, particularly at a time when VCs are doing more mergers and acquisitions than ever before,” Heesen said. In the first quarter of 2000, 55 mergers and acquisitions involving venture-backed companies were completed, with total deal value reaching $13.1 billion, according to data compiled by Venture Economics and the National Venture Capital Association. The value of this year’s mergers and acquisitions towers comparable deals done in the same period a year earlier, when deal value amounted to only $2.8 billion.

The pressure venture capitalists, entrepreneurs and industry organizations have been exerting is seemingly swaying the steadfast position taken by the accounting board, said Mark Gitenstein, a partner at Mayer Brown & Platt, a law firm that represents The Technology Network, a coalition of technology companies. Despite threats of legislation, he said, encouraging developments emerged from the most recent discussions in Congress. Every member of the subcommittee supported the idea that the regulator should compromise in some way with supporters of pooling, he said, and the policy change might not be completed by the end of the year, despite original projections that the proposal would become effective January 1, 2001.