What Was the Pooling of Interests?

The term pooling of interests refers to an accounting method that was used to combine the balance sheets of two companies that went through a merger or acquisition. The pooling of interests method allowed the merged or acquired company's assets and liabilities to be transferred to the acquirer at their 澳洲幸运5官方开奖结果体彩网:book values. The pooling-of-interests method was phased out in 2001 and replaced by purchase accounting to account for business combinations.

Understanding Pooling of Interests

Companies must account for assets and liabilities acquired from another business after completing a merger or 澳洲幸运5官方开奖结果体彩网:acquisition. There are accounting rules in place for the process. Pooli🥃ng of interests was a popular method used to account for the balance sheets of merged or acquired companies.

This method allowed assets and liabilities to be transferred from the acquired company to the acquirer at 澳洲幸运5官方开奖结果体彩网:book values. The assets and liabilities were simply summed together for a net number in each category when both balance sheets were combined. Past financial statements were then reevaluated. Intangible assets, such as goodwill, were not included in the calculatio🃏n of the pooling of interests.

The pooling of interests method was fairly popular because it excluded goodwill reductions. This eliminated the need for the new company to pay any amortized costs and also had a positive impact on 澳洲幸运5官方开奖结果体彩网:corporate earnings. As such, this gave the acquired company's 澳洲幸运5官方开奖结果体彩网:financial ratios a boost.

As noted above, the pooling of interests method of accounting was phased out by the 澳洲幸运5官方开奖结果体彩网:Financial Accou🦂nting St♉andards Board (FASB) in January 2001 under Statement No. 141. It was replaced by the purchase accounting method, which was an alternative accounting method companies could use in similar situations.

Poo🧜ling of Interests vs. Other Accounting Me💜thods

The purchase accounting method recorded assets and liabilities at their fair value as opposed to their book values. Any excess paid above the fair value price was recorded as goodwill, which needed to be 澳洲幸运5官方开奖结果体彩网:amortized and expensed over a certain period, which was not the case in the pooling-of-interests meth🎐od.

In 2007, the FASB further evolved its stance, issuing a revision to Statement No. 141 that the purchase method was to be superseded by yet another improved methodology—the 澳洲幸运5官方开奖结果体彩网:purchase acquisition method.

This method of accounting is similar to the purchase accounting method except that goodwill is subject to annual 澳洲幸运5官方开奖结果体彩网:impairment tests instead of amo🅷rtization. This was done to placate businesses that had to start paying expenses due to the amortization of goodwill.

The purchase method was officially replaced by the acquisition method after 2008 for 澳洲幸运5官方开奖结果体彩网:mergers and acquisitions (M&A) activity. This revision was adopted by different accounting authorities, including the FASB, to make reporting more accurate and transparent and to focus on fair value.

The Elimination of Pooling of Interests

The FASB ended the pooling of interests method in 2001 under Statement No. 141 because the purchase accounting method gave a truer representation of the exchange in value in a business combination. With the purchase accounting method, assets and liabilities were assessed at their 澳洲幸运5官方开奖结果体彩网:fair market values (FMVs).

The change also aimed to improve the comparability of reported financial information of companies that underwent combination transactions. Two methods producing different results at times vastly different led to challenges in comparing the 澳洲幸运5官方开奖结果体彩网:financial performance of a company that used the pooling method with a peer t🌺hat employed the purchase accounওting method in a business combination.

The primary reason (and the one that caused the most opposition to changing the methods) was including goodwill in the transaction. The FASB believed that the creation of a goodwill account provided a better understanding of 澳洲幸运5官方开奖结果体彩网:tangib🦹le assets versus intangible assets and how they each contributed to a company's profitability and cash flowsཧ.

This meant companies would have to amortize and expense goodwill over time, which negatively impacted earnings. This issue was resolved by the adjustment of using a non-amortized approach by incorporating an 澳洲幸运5官方开奖结果体彩网:impairment test. This would determine if the goodwill was higher than its fair value, and only then would it have to be 澳洲幸运5官方开奖结果体彩网:amortized and expensed.

The Bottom Line

Companies must account for the assets and liabilities of target firms when they go through a merger or acquisition. Some companies used the pooling of interests method in the past, which allowed them to use the book values of the target's assets and liabilities rather than the fair value. This method was first replaced by the purchase accounting method, which was also repealed when the FASB adopted the purchase acquisition method. After 2008, the FASB began using the acquisition method to account for business combinations.