Page 20 - FINAL CFA II SLIDES JUNE 2019 DAY 5.2
P. 20

Business Combinations                                                              READING 14: INTERCORPORATE INVESTMENTS
    Under IFRS: These are not differentiated based on the
    structure of the surviving entity.                                                  MODULE 14.6: BUSINESS COMBINATIONS: BALANCE SHEET



    Under U.S. GAAP, these are categorized as:
    • Merger –acquirer absorbs all the assets and liabilities of the acquire, which ceases to exist.
    • Acquisition -both entities continue to exist in a parent-subsidiary relationship (hence consolidated financial statements with reporting
      unowned (minority or noncontrolling) interest on its financial statements.
    • Consolidation: A new entity is formed that absorbs both of the combining companies. Historically, two accounting methods have been used
      for business combinations:
      (1) the purchase method; and
      (2) the pooling-of-interests method.

    The pooling method now eliminated from U.S. GAAP and IFRS. Acquisition method (which replaces the purchase method) is required.


    Pooling-of-interests method (also known as uniting-of-interests method under IFRS), combined the ownership
    interests of the two firms and viewed the participants as equals. Key attributes include:
    • The two firms are combined using historical book values.
    • Operating results for prior periods are restated as though the two firms were always combined.
    • Ownership interests continue, and former accounting bases are maintained.


    Note that fair values played no role in accounting for a business combination using the pooling method—the actual price
    paid was suppressed from the balance sheet and income statement.


     Analysts should be aware that transactions reported under the pooling (uniting-of-interests) method prior to 2001 (2004)
     may still be reported under that method.
   15   16   17   18   19   20   21   22   23   24   25