[Congressional Record (Bound Edition), Volume 145 (1999), Part 11]
[House]
[Page 16339]
[From the U.S. Government Publishing Office, www.gpo.gov]



                   THE FINANCIAL SERVICES ACT OF 1999

                                 ______
                                 

                          HON. JOHN D. DINGELL

                              of michigan

                    in the house of representatives

                        Thursday, July 15, 1999

  Mr. DINGELL. Mr. Speaker, as ranking member of the Committee on 
Commerce, which has jurisdiction over securities including the 
standards of financial accounting, and to whom was referred the bill 
H.R. 10, the Financial Services Act of 1999, I rise to clarify a matter 
involving the legislative history of this legislation. My remarks are 
an extension of remarks that I made during House consideration of H.R. 
10 on amendment No. 8 offered by Mrs. Roukema (July 1, 1999, 
Congressional Record at H5295 and H5299).
  During House consideration of this amendment (July 1, 1999, 
Congressional Record at H5294-H5300), several Banking Committee Members 
were recognized for unanimous-consent requests to revise and extend 
their remarks on that amendment which related to the manner in which 
insured depository institutions or depository institution holding 
companies report loan loss reserves on their financial statements. 
Because the House adjourned following completion of H.R. 10 at midnight 
on July 1, 1999, until 12:30 p.m. on Monday, July 12, it was not 
possible to review the material inserted by these Members until after 
the Independence Day District Work Period.
  In conducting that review, I have discovered nongermane and 
inaccurate remarks about an accounting practice known as ``pooling.'' 
These remarks, which were not before the House when it voted on the 
Roukema amendment, assert that the Financial Accounting Standards Board 
(FASB or Board) ``has not always sought adequate input from the 
accounting or banking communities on proposed changes in 
regulations''--a patently false statement when compared with both the 
public record and FASB's own procedures regarding due process--and asks 
the conference committee on H.R. 10 to ``include language either in 
this bill or future legislation to ensure that this process is an open 
and fair one'' (July 1, 1999, Congressional Record at H5296, bold type-
face material, 2d column).
  I have the following comments on that material which follows the 
statement that the gentleman from Alabama (Mr. Bachus) actually 
delivered to the House:
  Since 1996, FASB, the independent private sector organization that 
establishes and improves standards of financial accounting for the 
United States, has been publicly deliberating issues relating to the 
accounting treatment for business combinations.
  Currently in the United States, companies can account for a business 
combination in one of two very different ways: the ``purchase'' 
method--in which one company is the buyer and records the company being 
acquired at the price it actually paid--and the ``pooling-of-
interests'' method--in which two companies merge and just add together 
the book values of their net assets.
  The availability of two different accounting methods for business 
combinations is problematic for several reasons. First, it is difficult 
for investors to compare the financial statements of companies that use 
the different methods. The purchase method of accounting provides 
investors with different and much more useful financial information 
than does the pooling method--because the financial statements of the 
acquiring company in a purchase business combination reflect the 
investment it has made and provide feedback about the subsequent 
performance of that investment. Second, it affects competition in the 
mergers and acquisitions market (both domestically and 
internationally). Because companies that can use the pooling method do 
not report the cost of goodwill and other similar costs of the 
acquisition, they may be more willing to pay more than companies that 
must use the purchase method. This obviously can have a dramatic effect 
on shareholders. Third, the United States is out of step 
internationally--most other countries either prohibit the pooling 
method entirely or permit its use only as an exception.
  Finally, since the current accounting standards for business 
combinations were issued in 1970, the FASB, the American Institute of 
Certified Public Accountants, the Emerging Issues Task Force, and the 
United States Securities and Exchange Commission (SEC) have all been 
inundated with issues resulting from companies' seeking to use the 
pooling methods. Numerous interpretations of the pooling method rules 
have been required to address those issues. The high degree of required 
maintenance of those rules has led many to conclude that the current 
accounting rules are broken.
  After over a dozen public Board meetings, public meetings with the 
Financial Accounting Standards Advisory Council and the Business 
Combinations task force (both of which include preparers, users, and 
auditors), the issuance of two documents for public comment, and after 
carefully considering the input from all of its constituents, including 
the accounting and banking communities, the Board has tentatively 
decided that only one method, the purchase method, should be used to 
account for all business combinations.
  The Board's tentative decision reflects the view that virtually every 
business combination represents the purchase of one company by another 
and that the purchase method is the most appropriate method of 
reporting the economics of those transactions to investors. By allowing 
only one method of accounting for all business combinations: The 
investment made in the purchase of the other company is always 
reflected; feedback about the performance of those investments is 
provided; and investors can more easily make comparisons between 
investment opportunities, both domestically and internationally.
  As part of the FASB's extensive and open due process, the tentative 
decision regarding the methods of accounting for business combinations 
will be exposed for public comment later this summer as part of an 
Exposure Draft of a proposed new business combination accounting 
standard. In addition, early next year, the Board will hold public 
hearings to provide constituents an additional opportunity to directly 
discuss any concerns with the Board. Comment letters received in 
response to the Exposure Draft and the public hearing testimony will be 
carefully and fully considered by the Board at public meetings prior to 
reaching any decisions on the content of a final standard on the 
accounting for business combinations. FASB has kept the Congress fully 
informed on these matters of substance and process through document 
submissions and staff briefings.
  This accounting issue is controversial and will require extensive and 
careful review, realities that FASB fully recognizes and has taken 
steps to fully address. Legislation is not warranted. But I would like 
to point out that for some time, U.S. stock exchanges and many U.S.-
based multinational companies have been pushing for adaption of 
international accounting standards. I find it ironic that some segments 
of the industry are now opposing the adoption of international 
standards in area where those standards are arguably tougher and more 
honest and accurate than the current U.S. standard.
  The Securities Act of 1933, the Securities Exchange Act of 1934, and 
the Investment Company Act of 1940 are the basic laws that govern 
securities market regulation in the United States. Those laws, and 
related rules and regulations subsequently adopted by the SEC, 
establish the initial and continuing disclosure that companies must 
make if their securities are sold to or traded by the U.S. investing 
public. The goals of this disclosure system are to promote informed 
decisions by the investing public through full and fair disclosure, 
which includes preventing misleading or incomplete financial reporting. 
The success of this system has produced the world's most honest, fair, 
liquid, and efficient capital market. Financial statements are a 
cornerstone of this approach, and the quality and usefulness of those 
financial statements are directly dependent on the accounting principle 
used to prepare them.
  While the federal securities laws grant the SEC the authority to 
establish U.S. generally accepted accounting principles of GAAP, the 
SEC historically has looked to the private sector, and has formerly 
endorsed FASB, for leadership in establishing and improving accounting 
principles to be used by public companies, while the SEC retains it 
statutory authority to supplement, override or otherwise amend private 
sector accounting standards in the rare occasions where such action may 
be necessary and appropriate. This partnership with the private sector 
facilities input into the accounting standard-setting process from all 
stakeholders in U.S. capitol markets, including financial statement 
preparers, auditors and issuers, as well as regulators.
  This systems isn't broken and does not need to be fixed.




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