Page 20 - FINAL CFA II SLIDES JUNE 2019 DAY 5.2

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.