In my previous article, I mentioned that Financial Accounting Standard Board (FASB) and the International Accounting Standard Board (IASB) have been working together to promote international convergence of accounting standards.
In March 2004, the IASB issued IFRS 3 Business Combinations which replaced IAS 22 and three others interpretations i.e. SIC-9, SIC-22 and SIC-28.
Further, in January 2008, the IASB issued a revised IFRS 3 as part of a joint effort by the IASB and US FASB to improve financial reporting while promoting the international convergence of accounting standards.
Previously, in June 2001, FASB issuing FASB Statement No. 141 Business Combinations which changed the method of accounting for business acquisitions by adopting the acquisition (purchase) method and eliminating the pooling of interests as an alternative.
In December 2007, FASB issued a revised standard, SFAS 141 (R), Business Combinations, and SFAS 160, Non-controlling Interests in Consolidated Financial Statements.
Prior to the issuance of FASB Statement No. 141 in 2001, there were two methods available to record the acquisition of a company. The primary method, applicable to most acquisitions, was the purchase method. And the second was the pooling of interest method.
Purchase accounting recorded all assets and liabilities at their estimated fair values. When the price exceeded the sum of the fair values for individual, identifiable assets, the excess was attributed to goodwill. Prior to July 2001, goodwill was amortized up to 40 years.
With the issuance of FASB Statement No. 142, Goodwill and Other Intangible Assets, goodwill is no longer amortized. It is now tested for, and if necessary, adjusted for impairment.
Under the pooling method, all assets and liabilities were transferred to the acquiring company at existing book values, and no goodwill could be created.
Purchase and poling were not meant to be alternative methods available for any acquisition. It was intended that pooling would apply only to a “merger of equals”. Toward this objective, in 1970, APB Opinion No. 16, Business Combinations, restricted the use of pooling to transactions that met a strict set of criteria.
The most important of the criteria required that 90 % of the acquired firm’s common stock shares be received in exchange for the acquiring company’s common stock. All shareholders had to be treated equally in the distribution of shares.
Over time, many business combinations were “managed” so that they would meet the pooling criteria. This meant that the acquiring company would receive the more favorable accounting treatment.
Several perceived advantages led firms to try to use the pooling method.
The financial statement advantages incurred by the pooling method and the increased “gaming” to use the pooling method led to its elimination in July 2001 with the issuance of FASB Statement No. 141.
The FASB held that fair values should be used in all combinations. The lack of comparability due to financial statement distortions, which resulted from companies using alternative methods, could no longer be tolerated.
Even before the statement was issued, companies were reluctant to use pooling.
In the fall of 1999, Tyco International was criticized for stimulating earnings growth through the use of the pooling method. This precipitated a significant decline in the value of Tyco’s shares.
Tyco later announced that it would no longer acquire companies as a pooling of interests.
Some foreign countries still allow the use of the pooling method when similar-size firms combine; it is difficult to determine the buyer versus the seller in such cases.
(Excerpt from Advanced Accounting Textbook - Paul M. Fischer, William J. Taylor and Rita H. Cheng)
Read for further references :
- FASB Reconfirms Its Plans to Eliminate Pooling-of Interests Method of Accounting
- Death to 'Pooling of Interests'?
- Say Good-Bye to Pooling and Goodwill Amortization
- Everyone Out of the Pool
- Purchase and Pooling Headaches
- Controversy continues over pooling of interest vs purchase accounting
- Will elimination of pooling accounting reduce mergers and acquisitions?