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Bill Lewis, Prospect Technologies' CEO and President, testifies before the House Commerce Committee on the problems with FASB's methods to place a fair market value on high-tech firms
 Washington, DC May 2000 -- Bill Lewis, President and CEO of Prospect Technologies, has been called upon to be an expert witness before the House Commerce Committee to provide valuable input on FASB’s current treatment of the value of high technology / Internet firms. In his third appearance in less than a year - the prior testimony dealing with the Y2K issues - Lewis will discuss the pros and cons of both the pooling and the purchase method of accounting before the subcommittee on Finance of the House Commerce Committee. This is of particular interest to Prospect Technologies as it completed the purchase of a hardware manufacturing / service company in the spring of 1998. In addition, the result of this FASB ruling may have impact on many high technology / Internet firms as they grow via acquisition of other “dot com” firms.
In his testimony, Lewis mentioned that:
“Two years ago I merged [Prospect Technologies] with PC’s & Systems, Inc., a computer hardware manufacturing and services company. The transaction was reported using the pooling-of-interests of both companies and combination of our two historical balance sheets. However, in spite of Prospect Technologies recording this on its balance sheet as a simple sum of the assets of the two firms, the result of the merger created a synergy that allowed us to bid and win contracts that would not have been possible by either of the two previous companies individually. “
“Due to the positive results that the recent merger has had on the growth of my business, I am looking to combine with other businesses in the near future, especially with other Internet firms - “dot com” related businesses -- whose assets may be largely made up of “goodwill.” If I am required to use the purchase method of accounting, with its adverse effects on reported earnings, I may have second thoughts. If the combination results in a company that is required to amortize a large amount of goodwill, then the emerging enterprise will have a diminished capacity to access capital. For a growing company that reinvests most of its cash flow into its future revenue, even the smallest variance in its apparent profitability could have a major impact in capital formation. Moreover, if in the future, I were to decide to “go public,” artificial reductions of net income due to the use of purchase accounting could make such an offering less appealing. “
Furthermore, Lewis requests that FASB and the Congress await expert reports currently under way to address this very issue.
“While purchase accounting may have been useful for acquisitions of firms with a large percentage of physical assets, it is inadequate for combinations of firms composed primarily of intangible assets, especially when those intangible assets are largely unidentifiable, immeasurable and of indeterminate lives. It is hard to see how combining the historical book values of an arbitrarily designated acquiring firm with the estimated market value of an arbitrarily designated acquired firm and some dubious measure of goodwill yields a more reliable financial statement than a combination of book values, especially if the combined entity engages in successive combinations. Moreover, resorting to the approach of forcing a “write-off” of an intangible asset merely because accountants cannot understand or quantify it, is unacceptable.”
“A better course of action might be to examine the issues surrounding the accounting of intangible assets and goodwill, and to develop suitable methods for addressing this problem before prohibiting a long-standing and well-understood accounting method. We urge FASB to adopt this more cautious approach.”
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