- What Are the Differences Between the Acquisition Method and the Purchase Method in Accounting?
- Distinguish between pooling of interest method and purchase method.
What Are the Differences Between the Acquisition Method and the Purchase Method in Accounting?
Jun 10, The primary difference between pooling of interest method and purchase method lies in their applicability, i.e. while the former is applicable.and
Companies historically have had two methods for accounting for business combinations: the purchase price method and the pooling of interests method. However, the Financial Accounting Standards Board, or FASB, and the Securities and Exchange Commission faced substantial pressure to eliminate the use of the pooling of interests method, which it did in early Investors and analysts were dissatisfied with the lack of information about the acquiring company and the purchase price using the pooling method. The pooling of interests method of accounting for mergers and acquisitions involves consolidating the balance sheets of the two companies into one balance sheet based on book values. This is followed by the restatement of historical financial statements. This method excludes intangible assets from the consolidated balance sheet unless they were already recognized on the balance sheet of one of the legacy companies.
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In , accounting rule-makers changed the way that companies are required to account for the merger or acquisition of businesses from the existing "purchase method" to a new "acquisition method. Big-picture differences between the purchase method and the acquisition method. Philosophically, the purchase method accounted for an acquisition as the sum of the assets and liabilities being acquired. The acquisition method differs in that it views the purchase as the whole firm, not just the sum of its parts. That difference is subtle, yes, but it has implications for both the balance sheet and income statement of both companies in the transaction. For example, the acquisition method requires accountants to disclose contingencies -- potential assets or liabilities that the company may or may not recognize in the future.
On January 23, the Financial Accounting Standards Board "FASB" , the independent board responsible for establishing and interpreting generally accepted accounting principles, voted unanimously to effect an important change in the accounting treatment of "business combinations," which include most mergers and acquisitions. Specifically, in a move widely opposed by the business community, the FASB determined that all business combinations should be accounted for using the "purchase method" of accounting rather than the widely favored "pooling of interests method" of accounting. Certain proposed changes in the implementation of the purchase method of accounting, however, should allay the concerns of most in the business community who opposed the change in methods. The significance of the change in methods, and the basis of the business community's opposition to the change, derives from the manner in which goodwill is treated under each method, and the consequent effect on reportable earnings. Under the "pooling of interests method," the balance sheets assets and liabilities of the two "combining" companies are simply added together, item by item. Any premium paid over the market value of the assets or "goodwill" is not reflected in the merger or acquisition and, as such, does not need to be amortized and expensed on a going forward basis. Thus, the "pooling of interests method" has no effect on reported earnings, while the purchase method generates goodwill amortization expenses and a consequent drag on reported earnings.
Distinguish between pooling of interest method and purchase method.
Amalgamation implies a process of unification of two or more companies, which are involved in similar business to form a new company. As per Accounting Standard, Amalgamation can take place in two ways, i. When amalgamation is in the nature of merger the method of accounting used is the pooling of interest method , whereas is the amalgamation is in the nature of the purchase, purchase method of accounting is used. In pooling of interest method, the assets and liabilities are recorded at their carrying amounts in the books of the transferee company, whereas in purchase method, the assets and liabilities of the acquired company are recorded in the books of acquiring company at their fair market value, as on the date of acquisition. The article excerpt attempts to show light on the differences between pooling of interest method and purchase method, check it out. Basis for Comparison Pooling of Interest Method Purchase Method Meaning Pooling of Interest Method of accounting is one in which the assets, liabilities and reserves are combined and shown at their historical values, as of the date of amalgamation. Purchase Method, is an accounting method, wherein the assets and liabilities of the transferor company are shown at their market value in the books of the transferee company, as of the date of amalgamation.
Pooling-of-interests was a method of accounting that governed how the balance sheets of two companies were added together during an acquisition or merger. The FASB then designated only one method - the purchase method - to account for business combinations. The pooling-of-interests method allowed assets and liabilities to be transferred from the acquired company to the acquirer at book values.