Pooling of Interest Changes
September 6, 1999
The principal authoritative accounting pronouncement covering business
combinations is Accounting Principles Board Opinion No. 16, Accounting for
Business Combinations (APB 16). The Financial Accounting Standards Board (FASB)
has determined tentatively to amend APB 16 to eliminate "pooling of
interests," an advantageous method of accounting for business mergers and
acquisitions. FASB also has determined tentatively that only one method of
accounting, the "purchase method," should be used to account for
business combinations.
The purchase method requires the acquiring entity to record on its balance
sheet the fair market value of the assets it acquires in the combination. Under
this method, the excess of the purchase price over the fair market value of the
acquired company's net assets is accounted for as goodwill. Goodwill is charged
to the acquiring entity's earnings over a maximum period of 40 years under
current rules.
Under the pooling of interests method, the book values of the joining
companies are simply added together and recorded on the balance sheet of the
combined company. Goodwill does not result under this method thereby allowing
companies to avoid such a charge to earnings.
The elimination of pooling of interests would be effective for business
combinations initiated after FASB issues final rules on the topic. FASB expects
to issue these rules in late year 2000.