Purchase and Pooling

CFA Level II
#1

What’s the difference betwen purchasing method and pooling method?

#2

Well, I like laying by the pool more than I like purchasing stuff. Pooling Method > Purchase method in terms of friendliness to the BS Purchase - acquire, assets and liabilities are assumed by acquirer. Remember to test goodwill for impairment. write up assets to fmv. Depreciation is higher, NI is then lower due to this, profit margin is lower, ROE and ROA are lower. Pooling Method - combines ownership and views 2 companies as equals ie merger. two companies are accounted for with BV rather than FMV. Past operating results are restated. Pooling is no longer allowed

#3

polling- the old method but no longer in use for new acqusition but those that used it before the new purchase rule came are still allowed to report their records with pooling assets of target recored at book value purchase method record at fair value there fore more compared to pooling depreciation in p&L is high resulting low profits low equity i think

#4

purchase has lower equity? or they both have the same?

#5

Purchase has higher equity cause the bv of equity in the acquired company is is replaced by the purchase price (fmv).

#6

basically, everything is consolidated for both methods? except for pooling, bv is used and for purchase, fmv is used? Also, in purchase, it is more conservative with revenue, deducting depreciation from NI?

#7

I think it goes like this: Assets and Liab - BV for Pooling;BV acquirer and FV acquiree for purchase PP&E - Lower for Pooling;higher for Purchase LTD - Higher for Pooling;lower for Purchase Goodwill - No Gdw for pooling; gdw for purchase (excess price over FV of Net Assets) Paid in Cap - lower in Pooling;higher in purchase Post Acquisition - Assets may be understated and income overstated using pooling…this affects Return on investments ratios.

#8

trek7000 Wrote: ------------------------------------------------------- > > LTD - Higher for Pooling;lower for Purchase Why is this the case? > Goodwill - No Gdw for pooling; gdw for purchase > (excess price over FV of Net Assets) The original goodwill in the BS still exists or would be written off?

#9

Sorry, the LTD may have been just in the example I used in my notes. But under the Purchase method, you have to bring things to Fair Value…if the debt if written down to fair value, it will result in LTD being lower vs. Pooling where you just mash the B/S together. Goodwill for the acquirer will stay.

#10

Thanks!