Academic journal article Journal of Accountancy

FASB Rules out Pooling of Interests

Academic journal article Journal of Accountancy

FASB Rules out Pooling of Interests

Article excerpt

On April 21, FASB delivered a bombshell--the aftershocks of which are still being felt in the corridors of corporate America. FASB unanimously voted that day to eliminate pooling of interests as an acceptable method of accounting for business combinations.

Using the pooling-of-interests method, companies could add together the book values of their net assets without indicating which entity was the "purchaser" and which was the "purchased." When this method was used, investors often had difficulty telling who was buying whom or determining how to evaluate the transactions.

To help investors sort it all out, FASB decided to scrap the pooling-of-interests method in favor of the purchase method of accounting for mergers. With the purchase method, one company is identified as the buyer. The buyer records the assets of the company being acquired on its books at the price it actually paid.

"We believe that the purchase method of accounting gives investors a better idea of the initial cost of a transaction and the investment's performance over time," said Edmund L. …

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