M&A
Pooling-of-interests method (Equity pooling)
The pooling-of-interests method had the effect of overstating profits, and because it undermined accounting transparency, it has been prohibited in the United States (under FASB) since 2001. South Korea also prohibited the pooling-of-interests method starting in 2004 with the adoption of K-IFRS.
The pooling-of-interests method does not properly reflect the market price (i.e., how much was actually invested) in the financial statements during an actual corporate merger or acquisition. Because it does not recognize an acquisition premium or Goodwill, it is difficult for investors to evaluate the true cost of the M&A and the subsequent investment performance.
The pooling-of-interests method simply combines assets and liabilities at their book values, and because it does not recognize goodwill and simply combines profitability indicators (ROA, ROE), the figures appear higher than under the purchase method. In contrast, the purchase method amortizes goodwill by the amount paid in excess, which reduces net income.
- Only possible when the business combination is a merger through a share exchange, and the assets and liabilities of the two businesses are combined.
- This was especially pronounced in the banking industry; it is estimated that about two-thirds (approximately 66%) of U.S. bank mergers were accounted for using the pooling-of-interests method. 1
- It accounted for 52% of total transaction volume in 1998. 2
Purchase method
The amount paid in excess of the acquisition price (market price - [fair value or book value]) is recognized as Goodwill. Although this goodwill is recognized as an intangible asset, over time, through purchase price allocation, net income decreases by the amount paid in excess.
purchase price accounting
Purchase Price Allocation (PPA)
Purchase Price Allocation (PPA) is an accounting procedure that determines how to allocate the amount paid by the acquirer to the assets and liabilities of the target company during an M&A.
- PPA is an accounting procedure that fairly allocates the purchase price to assets and liabilities.
- It is a key tool for calculating goodwill, separating [assets] into amortizable intangible assets and recognizing them on the books.
No-capital M&A
Typically, after a no-capital M&A, financing is raised from the acquired company through a rights issue or issuance of convertible bonds.
Criteria for identifying no-capital M&A
Topics: corporations,Goodwill
Category: Wiki/Economy