Topic_24_E2(1).doc

Topic 24, Exercise 2 Accounting Treatment of Mergers A proposal by the accounting professional’s rule-making Financial Accounting Standards Board (FASB) to eliminate the pooling of interest accounting techniques for mergers and acquisitions has caused an uproar in the financial markets. A recent article that describes the proposal entitled, “Plan to Prohibit Pooling in M&A Accounting Causes a Title Waive of Controversy,” describes the proposal and identifies key issues. After reading the article, answer the following questions: 1. Describe the essential difference between a pooling of interest versus a purchase in the treatment of a merger premium. With a pooling of interest, company balance sheets are added together and the cost of the merger premium is not explicitly disclosed. The added price that the acquiring firm pays never makes its way to the profit and loss statements. With a purchase, the goodwill is explicitly recognized and amortized against income over time. 2. What two problems were identified with the pooling of interest method? First, the transaction is not transparent to the shareholders. Analysts cannot accurately assess the return on investment since they are not sure what level of merger premium was paid. Secondly, the treatment goes against a key provision of Generally Accepted Accounting Principles. When an asset is purchased, it is normally recorded at its cost and not some book value. With a pooling, the purchase price or market price is not reflected in the transaction.