Perspective and Issues

US GAAP had traditionally permitted two distinct methods of accounting for business combinations. The purchase accounting method required that the actual cost of the acquisition be recognized, including any excess over the amounts allocable to the fair value of identifiable net assets, commonly known as goodwill. The pooling of interests methods, available only when a set of stringent criteria were all met, resulted in combining the book values of the merging entities, without any adjustment to reflect the fair values of acquired assets and liabilities, and without any recognition of goodwill. Since pooling of interests accounting required that the mergers be achieved by means of exchanges of common stock, the use of this method was largely restricted to publicly‐held acquirers, which greatly preferred poolings since this averted step‐ups in the carrying value of depreciable assets and goodwill recognition, the amortization of which would reduce future reported earnings.

Pooling accounting was widely seen as not being indicative of economic reality, since mergers which were “marriages of equals” rarely, if ever, occurred, notwithstanding that this was the theoretical basis for using this method of accounting. Ultimately, the pooling method was eliminated, but gaining support for this change required a significant compromise by FASB on the related matter of goodwill accounting: under the rules established in FAS 141 and FAS 142 goodwill is no longer amortized, ...

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