Under current accounting rules, companies can deduct in a single year the goodwill they obtained through acquisitions—provided they can prove that future earnings won’t cover the annual deduction for goodwill amortization. Recently, several companies have chosen to exer¬ cise this option after recognizing huge dollar amounts of goodwill on large acquisitions financed primarily through borrowings. In 1993 Pathmark Corp. and Fort Howard Corp., for example, recorded immediate goodwill write-offs of $600 million and $2 billion, respectively. Other companies considered similar actions. 472 Part 3 Assets: A Closer Look The Wall Street Journal (November 16, 1993) reported that the FASB is seriously consid¬ ering making it more difficult for companies to write off goodwill in the year of acquisition by not allowing an interest deduction in the calculation of projected future earnings. Many of the companies, which would choose to immediately write off goodwill, finance their acquisitions with large amounts of debt. Disallowing interest in the calculation of future earnings would make it more difficult for these companies to “prove that future earnings won’t cover the annual deduction for goodwill amortization.” The article notes that “The rule could be partic¬ ularly troublesome for companies that have (financed major acquisitions with debt) and now decide they want to sell stock to the public again.” REQUIRED:

a. Why would a company wish to write off goodwill immediately in the year of the acquisi¬ tion, and why would the FASB wish to make it more difficult for a company to do so?

b. How would the new rule limit such write-offs, and how might it hurt “companies that have (financed major acquisitions with debt) and now decide they want to sell stock to the pub¬ lic again?”