- April 30, 2020
Pooling of Interest
Poolingof interests is an accounting method in which the financialstatements items of merging or acquisition in companies are simplyadded together item by item. This meant that goodwill would not becreated, therefore no need to amortize and expense it on a goingforward basis [CITATION Fis16 p 1 l 1033 ].The Generally Accepted Accounting Practise is the Purchase method.This is a method wherebythe merging or companies in acquisition the assets were exchangedbased on fair market value and any extra treated s goodwill. Thegoodwill is amortized and expensed on a going forward basis. The onlydifference between the two methods is the valuation of the assets ofthe company. In pooling of interests the assets are valued based ontheir financial statements and not on their fair market value. thishas been the main difference.
Thiscan be considered fraudulent because the value of the companies inacquisition or merging, will not reflect a true and fair view in thecurrent market. This means investors are in the dark with regards toreturns on future investments that might be generated. The return onequity of the merged companies through the pooling of interestmethod, it tends to rise. The earnings per share of the mergedcompanies tend to be high as they too will suffer the same fate asthe assets, and be added as per their current value in the financialstatements. This is the reason behind the method being consideredfraudulent. The investor gets an inflated sense of value for aninvestment that might not be worth that much. A good example is TycoInternational and its 1999 financial simulation of earnings growth,and the subsequent decline in share value.
Thepooling method was banned due to complaints from investors as theycouldn’t tell the value of their investments. This is truer withprivate companies as they are not required to disclose theirfinancial statements and as such may be prone to doctoring results inorder to paint them in a good light. The NYSE decision to outlaw isin law with the accounting standards in practise. With public listedcompanies, their financial statements are regularly disclosed and onecan acquire them easily by visiting their head offices. It would nothave been a significant impact.
Fischer, Paul Marcus, William James Taylor and Rita Hartung Cheng. Advanced Accounting. Boston: Cengage Learning, 2016.