Question

1 - Do a little research and review the treatment of business combinations between US GAAP and International Standards (www.ifrs.org). Which method do you think is more beneficial to the readers of the financial statements and why? Be sure to back up your opinion with authoritative sources and note your sources in APA format. Be sure to note your source and in-text citation in APA format and cite any corresponding FASB code.

Answer 1

THE DEVELOPMENT OF ACCOUNTING FOR BUSINESS COMBINATIONS by the methods which are described below:

For more than half a century, accounting for business combinations remained largely unchanged.

Two methods of accounting for business combinations, the purchase method and the pooling-of-interests method, were acceptable during that time.However, major changes in accounting for business combinations have occurred over the past decade. First, the FASB eliminated the pooling-of-interests method in 2001,leaving only a single method, purchase accounting. Then, in 2007, the FASB issued the revised standard (ASC 805) that replaced the purchase method with the acquisition method, which is now the only acceptable method of accounting for business combinations.

Although all business combinations must now be accounted for using the acquisition method, many companies’ financial statements will continue to include the effects of previous business combinations recorded using the pooling-of-interests method. Thus, a general understanding of this method can be helpful.

1.The idea behind a pooling of interests was that no change in ownership had actually occurred in the business combination, often a questionable premise. Based on this idea, the book values of the combining companies were carried forward to the combined company and no revaluations to fair value were made. Managers often preferred pooling accounting because it did not result in asset write-ups or goodwill that might burden future earnings with additional depreciation or write-offs. Also, reporting practices often made acquisitions appear better than they would have appeared if purchase accounting had been used.

2.Purchase accounting treated the purchase of a business much like the purchase of any asset. The acquired company was recorded based on the purchase price that the acquirer paid. Individual assets and liabilities of the acquired company were valued at their fair values, and the difference between the total purchase price and the fair value of the net identifiable assets acquired was recorded as goodwill. All direct costs of bringing about and consummating the combination were included in the total purchase price.

Acquisition accounting is consistent with the FASB’s intention to move accounting in general more toward recognizing fair values. Under acquisition accounting, the acquirer in a business combination, in effect, values the acquired company based on the fair value of the consideration given in the combination and the fair value of any noncontrolling interest not acquired by the acquirer.