This paper examines the differences between the purchase method and the pooling method used in accounting.
Written in 2002; 2,625 words; 8 sources; MLA; $ 79.95
Paper Summary:
This paper looks at the two different accounting systems for mergers and acquisitions, and evaluates their effectiveness. It uses the merger of Idol Steel and Crown Welding to demonstrate their point. First the details of the merger are first examined using the pooling of interests accounting system, and then, by the purchase accounting system. After the two cases are presented, the author presents a direct comparison of the numbers and the methods used to do the calculations, to show the strengths and weaknesses of these two methods. Through this comparison, the author substantiates the FASB' s elimination of the pooling method in order to improve financial reporting.
From the Paper:
"Accounting for a business combination using the pooling method is conceptually straightforward. Upon completion of the business combination, the balance sheet of the combined entity reflects the sum of the book values of the assets, liabilities and owners's equity accounts of the combining entities immediately before the combination takes place (Walter, pg 29). The pooling method treats the entities as if they had always been together and thus the combination as "non-event" (Baker, Lembke, and King, 2002, pg 20). Unlike the purchase method when utilizing the pooling-of-interests method it is not necessary to indicate which entity is the acquirer and which is the acquired (Journal of Accountancy, July 1999). However, in order to use the pooling method there are twelve criteria that must be met. If one of the criteria is not met the use of the purchase method is required but if all twelve criteria are met, the pooling method is required (Baker, Lembke, and King, pg 27)."
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