Question

The pooling of interests method uses book value vs. fair value to record certain business combinations. Does this approach seem to be a fair accounting representation given the core accounting principles?

Answer 1

The pooling-of-interests method allowed assets and liabilities to be transferred from the acquired company to the acquirer at book values. No goodwill could be booked. This approach didn't seemed to be a fair accounting representation given the core accounting principles.

The Financial Accounting Standards Board (FASB) issued Statement No. 141 in 2001, ending the usage of the pooling-of-interests method. 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.