Financial Services chairman likely to hold hearings soon to resolve accounting issue

Congress, which knows a thing or two about creative accounting, is about to stick its fingers in a issue that even private industry can’t sort out – how to handle intangible assets.

Rep. Michael Oxley, R-Ohio, chairman of the House Financial Services Committee, said recently that he is looking forward to working on the matter with colleagues and the Securities and Exchange Commission.

If past actions are any indication, the comment suggests that the chairman will hold hearings soon, although a spokeswoman says that none has been scheduled yet.

The committee chairman’s intention to weigh in on the issue comes on the heels of an SEC task force’s recommendation to set voluntary standards on the handling of intangible assets, an idea Mr. Oxley supports.

If Mr. Oxley decides to act, he also will be crashing an issue that the Financial Accounting Standards Board, a private organization in Norwalk, Conn., has been examining for some time.

The board, which sets public accounting standards, is exploring the possibility of requiring companies to attach values to intangible assets – brand names, patents, databases – and include them on balance sheets.

The accounting industry, meanwhile, would rather leave well enough alone.

“I don’t think it’s feasible to require more than what’s already being done,” says Philip Livingston, president and CEO of Financial Executives International in Morristown, N.J., which represents corporate financial executives.

“When you get into the details of what actually would be required to … try standardizing this stuff, you see it’s not practical,” says Mr. Livingston, whose group has yet to take a position on the task force report.

supplement urged

The treatment of intangible assets has become more contentious in the last few years, as the market value and the book value of many companies have moved farther apart.

Though it’s difficult to determine the value of an intangible asset, proponents argue that investors are being shortchanged without one when they try to evaluate a company.

The SEC task force, called the Garten Commission, stopped short of recommending that companies be forced to include the information or even attach a value to it.

“At this stage, we’re saying it should be supplemental and voluntary,” explains Jeffrey Garten, dean of the Yale School of Management, who headed the task force.

“But we’re signaling in the strongest way we can that we think there’s a huge gap in the accounting system,” Mr. Garten says.

His group has asked the SEC to issue a concept release soliciting comments on how to encourage supplemental reporting. The SEC has not yet responded.

Mr. Garten says he won’t be surprised if Congress gets involved.

“With half the population invested in the stock market … and all the issues that will arise if the administration privatizes part of Social Security, there will be more congressional interest in attempting to ensure the right balance is struck between market efficiency and investor protection,” Mr. Garten says.

Although some observers would prefer that Congress keep out, it won’t be the first time that Mr. Oxley has stepped in to referee an accounting imbroglio, if he chooses that course.

firestorm of protest

The standards board’s September 1999 proposal to eliminate what’s known as “pooling of interest” accounting in mergers launched a firestorm of protest, mostly from the banking and technology industries.

In April 2000, Mr. Oxley, then chairman of the House Commerce Committee’s finance subcommittee, and several colleagues sent a letter to the SEC suggesting that the agency was influencing the FASB’s agenda too heavily.

The following month, Mr. Oxley’s subcommittee held a hearing on the standards board’s plans to ban pooling-of-interest accounting.

The board ultimately said it would still ban pooling, but compromised on some related details.

The standards board has issued several related reports on intangible assets.

The most recent, “Business and Financial Reporting: Challenges From the New Economy,” was issued in April. The board is seeking comments until July 1.

Wayne Upton, author of the commission’s recent report, says it isn’t unusual for the FASB and SEC to work on the same issue.