Accounting: Profits Without Honor

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Many accountants consider such record keeping perfectly proper, and point out that if Paramount had not merged with G. & W., the film firm could have pocketed the same profit itself. Mergers accomplished by an exchange of stock, suggest the accountants, should be regarded as a marriage in which "you do not buy your wife — you merge your interests with hers." True enough—but the Accounting Principles Board's proposed rules would deny use of the pooling method to all but a handful of companies that merge. The key provision bars the pooling technique when one of the combining companies is more than three times the size of the other.

Yearly Write-Offs. Under the proposed rules, most companies that merge would have to use the "purchase method" of bookkeeping. With that system, a company that pays more than book value to buy another must frequently enter a considerable portion of the excess on its books as "goodwill." The effect can be judged from what accountants estimate would have happened to International Telephone & Telegraph Corp. if the proposed rules had been in effect during the ten-year reign of Harold Geneen. If forced to use purchase accounting for all the acquisitions it treated as poolings, so the estimate goes, ITT would have put $900 million of goodwill on its ledgers. To write off that amount over 40 years, the company would have to deduct $22.5 million per year from its profits at least until the year 2000.

Fortunately for ITT, the proposed rules are not retroactive. Whether any other company will have to follow them is questionable. The Accounting Principles Board itself is divided on the proposition. But the developing debate can only be enlightening. The public has too long accepted as gospel any figure that corporate managers have chosen to report as profit. The knowledge that experts argue bitterly over whether such figures can be trusted should be useful information to investors.