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 Financial Accounting Standards Board (FASB) issued Statement No. 141 in 2001, ending the usage of the pooling-of-interests method. The FASB then designated only one method - the purchase method - to account for business combinations. In 2007, FASB further evolved its stance, issuing a revision to Statement No. 141 that the purchase method was to be superseded by yet another improved methodology - the acquisition method.
Breaking Down Pooling-Of-Interests
The pooling-of-interests method allowed assets and liabilities to be transferred from the acquired company to the acquirer at book values. No goodwill could be booked. The purchase method recorded assets and liabilities at fair value, and any excess of the consideration paid for the target over the target's net tangible assets was recorded as goodwill to be amortized. The acquisition method is the same as the purchase method except that goodwill is subject to annual impairment tests instead of amortization.
Why Was Pooling-of-Interests Eliminated?
The primary reason FASB ended this method in favor of the purchase method in 2001 is that the purchase method gave a truer representation of the exchange in value in a business combination because assets and liabilities were assessed at fair market values. Another rationale was to improve the comparability of reported financial information of companies that had undergone combination transactions. Two methods, producing different results - at times vastly different - led to challenges in comparing the financial performance of a company that had used the pooling method with a peer that had employed the purchase method in a business combination. Last but not least, the FASB believed that creation of a goodwill account provided a better understanding of tangible assets versus non-tangible assets and how they each contributed to a company's profitability and cash flows.