In late September and early October, we observed substantial upheaval in the nation’s investment markets and severe tightening of credit standards as financial institutions came to grips with problems with their portfolios of mortgages and mortgage-backed securities. Some have linked this upheaval to accounting rules, which require entities to recognize impairment in the fair value of assets, the so-called “mark-to-market” rules. These accounting principles, which the Financial Accounting Standards Board, or FASB, has promulgated over the past several years, are part of the accounting profession’s efforts to align the United States’ generally accepted accounting principles with International Financial Reporting Standards, or IFRS.

With the implementation of Statement of Financial Accounting Standard No. 141R at the end of this year, the accounting rules for merger and acquisition activity are changing again. While these changes are intended to provide greater clarity in financial reporting and, like many recent accounting principles, convergence with IFRS, the procedural changes in accounting for acquisitions are likely to yield significant volatility in valuation and subsequent earnings of the combined entity. A few months back, the strategy to avoid this upheaval would have been to accelerate acquisitions, but, with the tightening of credit and uncertainty in financial markets, for many companies that strategy is no longer a viable option.

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