FASB Rules Out Pooling of Interests
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. Jenkins, chairman of FASB.
Use of the purchase accounting method will also bring the United States in step with other countries, because widespread use of the pooling-of-interests method is a U.S. phenomenon, he said.
“The United States not only is out of step with other countries on the pooling vs. purchase issue, but domestically we have a great deal of diversity in practice as well,” Jenkins said, in explaining the board’s decision.
“Transactions that are similar will all be afforded the same accounting treatment,” said James Leisenring, vice-chairman of FASB. “The purchase method is the way we always account for acquisitions of assets,” he said. “The fact that the assets happen to be acquired as part of a business combination is no reason to change the accounting model.”
Robert Willens, a CPA with Lehman Brothers, said FASB’s elimination of the pooling-of-interests method will increase the number and pacing of pooling transactions between now and the time the change goes into effect. FASB expects to issue a final standard in late 2000.