In this question, the answer is that for pooling of interests method, the total assets would be higher than under the equity method. However, one of the other choices was that revenue would be higher, but the answer says using the pooling of interest method would have no effect on revenue.
I am confused by this answer. I thought the pooling of interest method combines all of the financial statements for the two companies.
Or, are the two companies simply combined and thus form a new set of financial statements that are separate from the financials of the companies that are being combined?
Also, not sure what the text means when it says that “ownership interest continue and former accounting bases are maintained” for the two companies in the pooling of interest method.
The solution to this question is B (total equity is lower) and not C (total assets are higher) - see the CFAI books to verify.
I think you should not be comparing the pooling of interest method to the equity method (which is used for controlling interest), but compare the pooling of interest method to the acquisition method (used for business combinations)
“ownership interest continue and former accounting bases are maintained”: this means the resulting entity is treated if it has always been a single company (continuing ownership interest) and not as if it is the product of an acquisition. Thus if you have PP&E with a BV of $1 million and a fair market value of $2 million at the balance sheet of the target prior to the acquisition this will translate to PP&E of $1 million at the balance sheet of the resulting entity (while it would have been $2 million PP&E on the balance sheet of the resulting entity using acquisition accounting)
In order to prove that the reported equity is lower you have to assume that BV assets - BV liabilities < fair value assets - fair value liabilities … this is usually true given current accounting standards (e.g. US GAAP values inventory at lower of cost or market value, thus BV inventory <= fair value/market value inventory)
given that (or assumed that) BV assets - BV liabilities < fair value assets - fair value liabilities it follows that equity = assets - liabilities is lower if you use book values (pooling of interest method) rather than fair values (acquisition method), thus the correct answer is B total equity is lower using the pooling of interest method
For both pooling of interest method and the acquisition method the revenues of the resulting entity is just the sum of the revenues of the single entities.
As far as the third possibility (total assets higher using the pooling of interest method) is concerned: This is not the case, in fact I believe it to be the other way around, as goodwill cannot be booked under the pooling of interest method. Thus total assets should be lower using the pooling of interest method as long as the price paid for the acquisition was more than fair value of the targets assets [not entirely sure here, please correct me if I am wrong].