View from City Road: Shareholders can work it out

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The Independent Online
It is hardly surprising that industry should be so vehemently opposed to the new rules on acquisition accounting. The old system gave companies carte blanche to pluck whatever profit number they fancied from the books.

Companies like Siebe and Reed Elsevier have long argued with justification that the costs of integrating an acquisition cannot be divorced from the acquisition itself. If there is a cost of integration, then it should be provided for. The area of contention arises when companies attempt to treat the integration as if it has already happened, siphoning the costs away into blanket pre-acquisition rationalisation provisions. The bad news is thus neatly hidden in the small print of accounts, while the good news is trumpeted in soaring earnings and profits.

Admittedly, the new rules appear to be tougher than in the US, this at a time when the trend is towards harmonisation. They also appear to add yet another definition of earnings to the growing number already required by accounting standards. Opponents warn that shareholders will be bamboozled by the changes, rather than enlightened.

Not many institutional investors and shareholders seem to share that view, however. They all seem quite capable of coping with the new flow of information. Certainly anything is preferable to the present system, where the scale of pre-acquisition provisions can make the profit and loss account pretty meaningless for at least three years after a takeover.

The campaign against the changes is unlikely to end, however. A whispering campaign questioning the Accounting Standards Board's independence and competence is already under way. Sir David Tweedie has stood firm in the face of all attacks so far. He must continue to do so.

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