Wiley GAAP 2008

Concepts, Rules, and Examples

Purchase Accounting under FAS 141

Business combinations (of whatever legal form) involving unrelated entities (i.e., those not under common control), are required to be accounted for using the purchase method of accounting. The only current exceptions to this rule are not‐for‐profit entities or mutual enterprises, whose consolidation accounting is currently being deliberated by FASB. The longstanding option in US GAAP to treat certain transactions, meeting a series of restrictive criteria, as “poolings of interests “no longer exists for newly transacted business combinations. Purchase accounting is an application of the cost principle, whereby assets obtained are accounted for at the price that was paid (which, in an arm's‐length transaction, represents fair value). A purchase transaction gives rise to a new basis of accounting for the purchased assets and liabilities.

Pooling has been banned outright, effective for transactions initiated after June 30, 2001. The use of grossly disparate methods of accounting for what could be almost identical economic transactions was no longer seen as being conceptually defensible, despite widespread use not only in the US but in many other nations as well (although, in recent years, the use of pooling had been sharply curtailed by many nations' accounting standards). Though defended by some (principally publicly held entities that generally were able to structure stock‐swap acquisitions and which were often very ...