Under pooling method, when a company acquire another company, the money paid exceeds book value. Should the excess amount passby the income statement directly into equity or go into income statement as an expense? Thanks in advance
I don’t believe you have to know that for the exam.
under the pooling method, there is no “acquisition”. assets and liabilities are kept at historical cost, so there is no new goodwill. it’s as if both firms had been one from the beginning.
in case of pooling the statements are restated as the new entity is a completly different company than either of the previous two. balance sheet will have book values combined. income statement will just have the revenues and costs of the two companies combined - and no costs benefits created by the merger. for purchase the company that aquires writes up the assets. that is my understanding
cfasf1 Thank you for your answering. Maybe ‘acquisition’ is inappropriate word here. ‘Merger’ is better. Okay. Let’s say a business combination. ABC company paid 10 billion for combining T company whose book value is 9 billion. Whether the substance is acquisition or not, suppose the manager could adopt pooling method for this business event in certain way. So, My question is: Should the 1 billion be accounted for as equity deduction or expenses under pooling method?
In my opinion neither. Because nobody ‘pays’ anybody. Merging companies X and Y would each receive a number of shares in the new formed company Z. the shares allocated would probably be based on fair value of the assets.Nobody would accept one company to receive a bigger stake in the new company that they should - there is no reason for it. The new company would have a book value composed of the two book values of X and Y.
oversun Wrote: ------------------------------------------------------- > cfasf1 > > Thank you for your answering. > > > Maybe ‘acquisition’ is inappropriate word here. > ‘Merger’ is better. > > Okay. Let’s say a business combination. ABC > company paid 10 billion for combining T company > whose book value is 9 billion. Whether the > substance is acquisition or not, suppose the > manager could adopt pooling method for this > business event in certain way. > > So, My question is: > Should the 1 billion be accounted for as equity > deduction or expenses under pooling method? oversun, To serve your intuitions straight, Just think of POOLING method as a MERGER and PURCHASE method as a ACQUISITION So ABC gets destroyed, T gets destroyed too, and a new company named ABCT gets formed by adding the BOOK VALUES of the ABC and T (line-by-line). Nobody gets anything extra.
Thank you florinpop ok. How about: the combination is actually an acquisition, but the manager somehow account for as a merger, for instance, changing the name as ABC&T, and well-prepared all the legal-document to be a ‘merger’. However, the accounting substance is ABC acquire T(i.e. purchase method) The way ABC achieve that can be: ABC give T’s shareholder share-offering or whatever compensation. That’s the reason why pooling method is no longer available. Because all the larger company’s managers will try very method to account a business combination as ‘pooling’, which will not boom up assets significantly, which is good for such ratio as ROA and return on capital employed etc. Again, I just want to know: Should the 1 billion be accounted for as equity deduction or expenses under pooling method?
remeber that I only went once through this material so i might be dead wrong. But the fact that they use pooling method - means that fair value does not come into play on the balance sheets so looking at it from accounting perspective there is no premium, no overpayment. I don’t believe they mention in the book how they account for how many shares in the new company each of the merging companies receive but I am assuming it would be on an estimate of fair value of each company. Even so an over payment might be possible just because there is no statement of fair value on the balance sheet- all happens at book value and by the fact that in allocating the shares the company that actually buys the other one would consider fair value to have a little premium imbedded. Again I am just assuming but the answer would still be nowhere. It is totally different with purchase where you write up the assets and that reflects in higer depreciation
let’s wait for accounting professionals to answer this question.
yes we should hear some expert opinions
Oh. I’ve got another issue need to be cleared. Suppose a company use pooling method for a former business combination, should it be restated using purchase method under new US GAAP requirement. How about IAS’s requirement on it? By the way, CFAI are really old fashion. I remember that in level one curriculum last year it stated IAS still allows both pooling and purchase method. However, IAS do not allow pooling right after US GAAP’s forbiddance of pooling. My college supervisor is IASB’s board member.
US GAAP and IAS GAAP both use Purchase method for reporting of acquisitions. Pooling method is extinct now
dinesh.sundrani thank you for your replying. may be you have some misunderstanding. My question is: Suppose a company use pooling method for a former business combination(let’s say it happened in 2001, when pooling is still allowed), should it be restated (restated it into fair value, there will be goodwill if necceccary) using purchase method under new US GAAP requirement. How about IAS’s requirement on it?
Maybe the problem here is some mix of financial statement analysis and accounting procedure. There is no accounting reason (like laws, GAAP, etc.) to restate any pooling mergers. I suppose there might be some FSA reason, but these combinations are getting a little old (would restating Daimler/Chrysler be of any use now?). The same applies to the “Should the 1 billion be accounted for as equity deduction or expenses under pooling method?” This would only be of interest if you were restating a pooling merger under the purchase method. You would be doing that to understand the impact of the accounting method on your valuation of the firm (I guess). In that event you can do any paper thing you want with that, but it probably depends on your view of whether the goodwill is really worth anything. A much more relevant question is about the book values, not the category you put the goodwill into (and why not just goodwill?).
backing when pooling was an acceptabel method, it wasn’t management’s choice to pick pooling or purchase. In order to qulaify fpr pooling yopu had to met a stringent set of rules, the most important of which was that it had to be an all stock deal. The condept wasthis. Let’s say that you had two groups who owned company A and B. Then either A issued new stock to B shareholders for its company, or a new company C was created which gave shares to both A and B shareholders. At the end of the day, the original owners of the separate companys had rporata ownership of the combined company. Continuity of business, continuity of ownership, this is why historcial cost was carried forward. Oversun, the question you are asking about value of stock given vs, book value is irrelevent, becuase is deciding what the excahneg ratio of the shares is all of that is considered, and it all sort of runs through additional paid in capital. As mentioned above, the further we get from the date when this was allowed, the less relevent the non-write-up of depreciable assets becomes when comparing against compnaies from the same vintage who combined under a purchase methodology.
oversun, each time you’re referring to pooling and then spelling out a fair value scenario. Goodwill can only be created under fair value, under pooling there is no additional expenses beyond bv and hence no resulting additional goodwill. Ini addition, pooling is not technically “extinct” as it is still allowed under some circumstances under IAS, however, it is less relevant. In addition, you may still come accross its impacts in historical equity analysis so it’s good to know.
I think it’s a pretty big waste of time actually. Why can’t CFAI recognize that pooling s a really marginal topic in FSA now, not to mention a very marginal topic in finance? It’s not like there isn’t a bunch of stuff to know.
In doing equity credit analysis at work, I frequently come accross companies that had major mergers via pooling of interests in the not to distant past. I think its important to know what the hell your reading about when it’s historically referenced in a 10K.
Thank you, fellows Super I. Ok. Can you tell me the reason why pooling is not allowed now? The season is puchase method will recognise a bunch of fair value after M&A a company, which the manager does not like. Hence, the manager will attempt to fullfil stringent set of requirements for pooling method to avoide purchase method in order to reduce carrying cost (i.e. the assets or said capital employed) to make certain ratio nice (i.e. ROA, ROC), although it should be using purchase in the view of substance (remember GAAP setter always emphasise ‘substance over form’). Hence, pooling is not allowed under both IFRS and US GAAP. Remember, manager will do everything to make financial report looks good, just like Enron off-balance the SPE. That’s the reason why CFA curriculum have a large percent on FSA. That’s the reason why pooling method is not allowed any more, because manager can achieve the pooling requirement. For instant, You can check GSK annual reports from 2001 to 2005, which is a large british pharmacy company having got a lot of M&A project. The company account for all the M&A case as pooling method before 2003. Black Swan can you tell me how “pooling is not technically “extinct” under IAS”? I do not get it. Can you give me an example?