International Mergers & Acquisitions and Accounting Standards: Emerging New United States Standards
Files
Description
Following a merger, the surviving company must report on its financial statements the assets and liabilities, as well as the net income, of the combined companies. During the last half of the 20th Century, there have been two competing methods to implement this reporting, the ‘pooling of interests’ (or ‘pooling’) method, and the ‘purchase’ method. The financial statement differences of these two methods are significant and controversial. Pooling, which is based on the notion that the merged companies are combined, with no basis for new accounting, fundamentally carries forward the values and accounting methods of the combining companies. Purchase, which is based on the view that one of the companies is acquired by the other, fundamentally treats the acquired company as though it has been purchased by the acquiring company. Purchase accounting therefore requires a new basis of accountability for the acquired company. In most mergers, the value of the consideration (whether stock, debt, cash or other consideration) given in exchange for the acquired corporation exceeds substantially the carrying value of its assets on its books. Herein lies the difference between purchase and pooling: pooling carries forward the historical values, whereas purchase results in a revaluation, usually with substantial increases in the carrying values of assets. The difference has implications on both the balance sheet and the income statement. Merger accounting has been the subject of intensive recent study in the accounting profession. The International Accounting Standards Board (‘IASC’) recently adopted a statement narrowing significantly the permissible use of pooling, and the Financial Accounting Standards Board (‘FASB’) in the United States has under consideration an Exposure Draft that proposes elimination of pooling altogether. These accounting principles have important implications on cross-border mergers and acquisitions.
Source Publication
Cross-Border Mergers and Acquisitions and the Law
Source Editors/Authors
Norbert Horn
Publication Date
2001
Recommended Citation
Siegel, Stanley, "International Mergers & Acquisitions and Accounting Standards: Emerging New United States Standards" (2001). Faculty Chapters. 1411.
https://gretchen.law.nyu.edu/fac-chapt/1411
