Mergers – No More Pooling

By: Dave Thomsen, Partner email

For many years, two methods of reporting mergers, the purchase method and the pooling of interests method, had been available to account for mergers and acquisitions “in accordance with generally accepted accounting principles.”  In 2001, the Financial Accounting Standards Board (FASB) discontinued the acceptance of the pooling of interest method except for certain business entity types such as mutual enterprises like Farmer cooperatives. However, the FASB has recently issued Statement No. 141(R) that now eliminates the pooling of interests method altogether and also introduced other new requirements to be considered in most, if not all, business combinations. As most of you know, the pooling of interests method simply combined the accounts of each merging company at book value, with no adjustments to reflect market value differences.  In addition, retained savings of both companies were also combined. On the effective date of FASB 141(R), any new business combination will be required to use the purchase method to measure and recognize the fair value of all assets and liabilities of the companies being combined.  A few of the significant issues we see from this new approach are:
  • Under the purchase method, one company will be identified as the Acquirer and the other(s) as the Acquired.
  • Greater attention will now be placed on the fair value of assets as compared to book value. This applies to both the Acquirer and the Acquired. Appraisals of property and equipment will be much more common in mergers than in the past, and though investments in other cooperatives will be recorded at cost, an adjustment may be included to reflect fair value based on present value calculations.
  • Rather than adding the retained savings of the Acquired company to those of the Acquirer, that retained will disappear and any additional value of unallocated equity, net of fair market valuation adjustments may transfer to allocated equities (write-ups as opposed to write-downs) or be recognized as a bargain purchase gain or goodwill.
Previous mergers have always tried to take into consideration “balance sheet equalization.”  That equalization will continue with future mergers, only it will become more transparent. The new rules are effective for business combinations with acquisition dates that occur on or after the first annual reporting period beginning on or after December 15, 2008. For help in understanding the new guidelines under FASB 141(R), please give us a call.