Pooling occured before June 2001, I know this for fact. Saw a Schweser answer on a mock where it said exactly the opposite. Purchase method is used now… My question is tho, what will happen to ratios if we use purchase vs pooling? (assuming MV>BV) My understanding is that the ratios (ROE, ROA,and NPM) are higher under pooling. Is this because of the goodwill that is paid in purchase method decreases the profitability or are there other factors to this?
Are ratios different because assets are marked to FV using purchase and are kept at BV with pooling? (pooling is like both firms merge/buy eachother)
Pooling is 2006 - if I am not mistaken, not 2001 as stated above. In Pooling - BV of Target is added to BV of Acquirer - hence total assets do increase - but not by as much as when in the Purchase method where the BV of Acquirer is added to FV of the target - and hence assets would be much higher. Additionally - Pooling requires all past financial statements to be “recast” as though the two companies had been together as 1 entity since the very beginning. Even if Pooling occurs in the middle of the year - it is as though it had happened in the beginning of the year (in fact forever). Purchase method distorts net income - because it is effective as of the acquisition date. Higher asset base is depreciated (FV of asset is usually higher than Book value of assets of the target). Higher cost allocations of inventory, depreciation, interest expense and amortization expense cause the NI figure in the Purchase method to be lower than in Pooling - and hence the margins. Mixture of historical cost and fair values affects comparability under purchase. Pooling - since prior periods are restated - allows for better comparison. So Purchase -> Lower Turnover ratios - Fixed asset, Inventory, Total asset. (fv recognition of acquired assets and goodwill) - Higher cost allocations of inventory, depreciation, and identifiable intangibles (amortization expense) - leads to lower profitability ratios (Gross, Net and Operating profit margins). ROA - lower under purchase bcos of higher assets. Leverage - if debt is used for acquisition - Leverage will be higher. If Stock is issued for the acquisition -> Equity will go up.
thanks CP, good explain