Purchase v. Pooling

CFA Level II
#1

(1) The purchase method makes comparison over time difficult because the financial statement are restated only from the date of acquisition forward. (2) The pooling method compared to the purchase method results in relatively lower earnings in the future because of the use of book values instead of fair market values. (3) The pooling method makes comparisons over time easier because the financial statements are restated on a retroactive basis. How many statements are correct? A) 1 B) 2 C) 3 D) None

#2

Guesswork here… 1. true 2. false 3. true so B?

#3

I thinking B

#4

I am going with B as well. 1. Yup. 2. Earnings would be higher under pooling since depreciation would be lower, right? 3. Yup.

#5

B?

#6

(1) & (2) are correct. Hence B) 2 (2) The pooling method compared to the purchase method results in relatively HIGHER earnings in the future because of the use of book values instead of fair market values. Since PP&E hasn’t been wrtitten up, the pooling method will result in LOWER depreciation, leading to HIGHER earnings when compared with the purchase method.

#7

(1) & (3) are correct. Hence B) 2 (2) The pooling method compared to the purchase method results in relatively HIGHER earnings in the future because of the use of book values instead of fair market values. Since PP&E hasn’t been wrtitten up, the pooling method will result in LOWER depreciation, leading to HIGHER earnings when compared with the purchase method.

#8

1 & 3 correct -> B

#9

^^^I would also add to this that excess of purchase price over fair value in the purchase method first results in writing up assets to fair value (including PPE), followed by intangible assets with the remainder as an increase to goodwill. Future earnings under the purchase method will be consequently lower due to the increased depreciation of PPE and intangibles, in addition to impairment charges to goodwill.

#10

I agree. B.

#11

yep…gotta be B

#12

Agree with B.

#13

hopping onto the B andwagon…

#14

why does the use of the purchase method make comparisons more difficult?

#15

gottcha… restatements are a good thing… i drew a blank on that…thanks

#16

b

#17

b

#18

I am kind of skeptical between B and C… Second statement is > The pooling method compared to the purchase method results in relatively lower earnings in the future because of the use of book values instead of fair market values. For current period earnings would be higher as FMV usually higher than historical cost but what would happen in the future?

#19

Assets are written up under the purchase method and subsequently written off through depreciation or amortization. So under the purchase method NI will be the same except for the incremental increase in depreciation and amort. This will decrease NI for the purchase firm until the assets are completely written off (presumably quite awhile).

#20

that caught me out. good question