A global shake-up of accounting rules could affect the way Hong Kong's long-awaited banking merger and consolidation process unfolds. The changes are aimed at forcing greater disclosure to shareholders on the true costs of mergers. In the SAR - as is the case in the United States and Britain - two procedures exist when accounting for mergers: acquisition accounting or merger accounting. But growing discontent with merger accounting (or the 'pooling of interests' method) - which critics say fails to reveal the full impact of the cost of an acquisition - is forcing change to the dual system around the world. The US' Senate Banking Committee last week took another step towards burying the merger accounting method. The committee's meeting to discuss the treatment of goodwill came against the background of discussions by the country's Financial Accounting Standards Board aimed at eliminating the pooling of interests method. A step ahead of these developments, the Hong Kong Society of Accountants (HKSA) tightened its accounting rules in April. In all but the rarest circumstances, said the HKSA, it was possible to identify an acquirer when two entities were combined - and hence acquisition accounting ought to be used. Paul Kennedy, banking partner at KPMG, says the condition in all three regimes for using merger accounting is that the companies to be combined should be of similar size and it should not be possible to identify either one as an acquirer. 'What the approach says is that if you have a merger of equals, such as Citicorp and Travellers for instance, you may then use the pooling of interests method,' said Mr Kennedy. This means the balance sheets of the two companies may simply be added together in a new set of consolidated accounts drawn up for the merged company. This approach has a twofold benefit: no goodwill is created and charged against the newly combined company's future profits; and pre-acquisition profits are not locked in the shareholder reserves of the new company and hence quarantined from ordinary dividend distributions. By contrast, when the acquisition method is used, goodwill is created and recognised as the surplus over net asset value which is paid for an acquisition. This surplus is a cost which must be charged against the profits of the combined company and the procedure gives shareholders a sharp focus on the true cost of an acquisition. Where substantial goodwill arises, the result may even be to turn future profits of the combined company into losses. 'The argument as far as I see it,' said Mr Kennedy, 'is that too many US mergers were done using the pooling of interests' method and were, therefore, not accurately showing shareholders the true impact of acquisitions. 'There is also an argument that because you have two different methods you lose comparability, and for these reasons the US is considering removing the option of pooling of interest accounting.' With the US going down this route the pressure on Hong Kong to follow has been irresistible. This means mergers are now more likely to be accounted for using the acquisition method, which will result in locking up pre-acquisition reserves and creating goodwill to be amortised against profits of the new entity.