Question

Explain what you understand about this statement: “Now that pooling-of-interests method has been abolished, analysts can relax in their assessment of M&A accounting.”

Answer 1

The primary reason FASB ended this method in favor of the purchase method in 2001 is that the purchase method gave a truer representation of the exchange in value in a business combination because assets and liabilities were assessed at fair market values. Another rationale was to improve the comparability of reported financial information of companies that had undergone combination transactions. Two methods, producing different results - at times vastly different - led to challenges in comparing the financial performance of a company that had used the pooling method with a peer that had employed the purchase method in a business combination. Last but not least, the FASB believed that creation of a goodwill account provided a better understanding of tangible assets versus non-tangible assets and how they each contributed to a company's profitability and cash flows.