Hi,
In CFA Curriculum, Reading 17 EOC problem #19, in the paragraph leading up to question 19 it states that “BetterCare Hospitals acquired Statewide Medical in 2001 under the pooling of interests method. BetterCare complies with US GAAP.”
Question 19 is: "Compared to accounting principles currently in use, the pooling method BetterCare used for its Statewide Medical acquisition has most likely caused its reported:
a) revenue to be higher
b) total equity to be lower
c) total assets to be higher
(No financial data provided for this question)
The answer is b, which I do not understand, because under the pooling of interests method I would expect total equity to be higher because of the summed up Retained Earnings of both entities.
In the solution for 19 it explains “Statewide Medical was accounted for under the pooling of interests method, which causes all of Statewide’s assets and liabilities to be reported at historical book values. The excess of assets over liabilities generally is lower using the historical book value method than using the fair value method…”
Could someone please explain this answer to me?
Thank you