Guys, I remeber this question, I got it wrong. My answer? B. The reason they gave is that "The pooling method makes comparisons over time HARDER (not easier) because the financial statements are restated on a retroactive basis. So only 1 is correct. A.
The correct answer, guys, is A). Why? Because the third statement is also incorrect: The pooling method DOESN’T makes comparisons easier because the financial results (post-merger) are improperly accredited to the old management ( balance sheet figures restated on a retroactive basis). JL
Hmmmm…
Whenever I see purchase / pooling type of questions, i started panicking…
funny, I feel that way whenever I see ANY question
I actually knew this one. Maybe there is hope afterall…
Smarshy Wrote: ------------------------------------------------------- > Guys, I remeber this question, I got it wrong. My > answer? B. > > The reason they gave is that "The pooling method > makes comparisons over time HARDER (not easier) > because the financial statements are restated on a > retroactive basis. > > So only 1 is correct. A. prob_13- please confirm the answer and explanation Smarshy - can you elaborate? If I was looking at company x post merger earnings compared to premerger earnings (which I recently had to do), I would have a difficult time understanding the true year over year changes in earnings under purchasing for the parent company, unless I got my hands on the pro forma numbers, because the GAAP comparison gives me the revenue contribution from both firms for the current year, where the previous year revenue only reflected the parent. Therefore, this made the parent, under purchasing, appear that it had a greater year over year increase in revenue. As a result, I had to look at the pro forma (non GAAP) earnings to see the “true” year over year increase. If the earnings had been restated retroactively, such as in pooling and if this would have been a GAAP measure, I would not have had to rely on pro forma and I could have relied on GAAP earnings because the previous earnings would have been restated as if the companies were always combined.
Well I’m sure I’ll fall on my face here, and since I can’t remember where I saw this question I can’t conjure up their explanation. But I can try to remember it: You say “I would have a difficult time understanding the true year over year changes in earnings under purchasing for the parent company,” but I think this is actually the case under pooling, i.e. it is difficult to compare a firm pre-merger to it’s post-merger self because all it’s pre-merger results are restated. So if you wanted to see how the results of a merger under pooling affected the fundamentals of a firm, it would be hard to compare post merger to pre-merger because pre-merger effectively vanished. That make sense?
I could see not being able to do some trend analysis using back years data because they would all be restated.
Smarshy Wrote: ------------------------------------------------------- > Well I’m sure I’ll fall on my face here, and since > I can’t remember where I saw this question I can’t > conjure up their explanation. But I can try to > remember it: > > You say “I would have a difficult time > understanding the true year over year changes in > earnings under purchasing for the parent company,” > but I think this is actually the case under > pooling, i.e. it is difficult to compare a firm > pre-merger to it’s post-merger self because all > it’s pre-merger results are restated. So if you > wanted to see how the results of a merger under > pooling affected the fundamentals of a firm, it > would be hard to compare post merger to pre-merger > because pre-merger effectively vanished. > > That make sense? Im sorry, but I’m still going with B. From an article the CPA Journal: “Some accountants agree that pooling facilitates the comparison of financial information year-to-year and thereby provides more usable information to financial statement users than does the purchase method. Purchase accounting allows a combined company to report growth in operations and earnings even if no actual growth occurs.” The reason why pooling is no longer a GAAP measure is b/c FASB did not like the fact that pooling does not hold companies accountable for the actual price they pay in excess of fair value in acquisitions (i.e. no goodwill). If you look back to the late 90’s, there were lots of mergers happening across industries all over the U.S. and companies were accounting for them using the pooling of interests method, which allowed them to avoid huge depreciation charges associated with huge premiums over existing book values. The comparability issue was that related to the comparability of companies in countries where pooling is allowed vs. countries where it is not allowed.
I’m not defending A as the answer, just explaining that Schweser and/or CFAI believe it to be A. You can have the most brilliant explanation ever about why B is the answer, but if CFAI believes it to be A you get the answer wrong.
Prob - 13 what is the answer? source? proof? these are last days…and as u well know there is no time…
No wonder I got that one wrong…I read it as “which one is correct”, not “how many are correct”…i was thinking both of them are f’in right. RTFQ