When was pooling accounting eliminated

For this reason, the pooling of interests method was widely favored by the business community. The FASB's desire to eliminate the pooling of interest method of accounting for business combinations was predicated upon its interest in "improving the quality of information provided to investors and users of financial statements.

Without the information that the purchase method provides, investors are left in the dark as to the real cost of one company buying another and, as a result, are unable to track future returns on the investment. The elimination of the pooling of interests method in favor of the purchase method, however, may not result in the impact on earnings once feared by the business community. An important compromise appears to have emerged regarding the treatment of goodwill when accounting for business combinations under the purchase method.

Specifically, as part of its general rulemaking, the FASB has tentatively decided to use a "nonamortization approach" to account for purchased goodwill. Companies are not required to perform the annual impairment test at the close of the fiscal year, but they must perform the initial step of the impairment test within the first six months after the beginning of their fiscal year.

Additionally, they can perform the fair value measurement for each reporting unit at any time as long as they use one measurement date consistently from year to year. Companies may choose different measurement dates for various reporting units.

The standard also provides for interim testing of goodwill impairment between annual tests when circumstances might reduce the fair value of the reporting unit below its carrying value. Examples are a market decline, regulatory action, new competition or a loss of key personnel. Financial statement preparers will do the following for interim testing:. Identify the reporting units affected by the acquisition and recognition of goodwill.

Identify the goodwill and other net assets associated with the reporting unit as well as the model and key assumptions to be used to measure the fair value of that reporting unit. Refrain from recalculating the fair value of the reporting unit each year if its components have not changed since the previous fair value calculation, the previous fair value amount was substantially greater than the unit carrying amount and no evidence exists that the current fair value of the reporting unit may be less than the current carrying amount.

Finally, interim testing will be necessary when a company expects to sell or dispose of a reporting unit or a significant portion of one. A significant asset group in the reporting unit is tested for recoverability under Statement no.

Statements no. Companies will not have to test existing goodwill for impairment immediately on adoption unless an indicator of impairment, such as a significant market decline in equity, exists. However, they must conduct a benchmark goodwill assessment within six months of adoption for all significant prior acquisitions, which will be the first determination of current goodwill value.

Because companies must conduct goodwill impairment tests annually, the standard does not require them to benchmark assessments after an acquisition or internal reorganization that changes their reporting structure. Companies will report pro forma income before extraordinary items and pro forma net income until they report goodwill in all periods shown on financial statements under the new regulations. The pro forma amounts will exclude amortization of goodwill and companies can report them either on the face of the income statement or in the notes to the financial statements.

The company should provide a reconciliation of reported earnings to pro forma earnings in the notes, and should also report pro forma earnings per share either on the face of the income statement or in the notes.

To those who argued companies should retain the option to amortize goodwill, CPA Mike Mathieson, former vice-president and controller of Fortune Brands, Inc. Also, a good impairment test promotes transparency because the trigger is a change in underlying economic or business conditions, not an arbitrary time period. As a result, the reporting will be based on current events affecting the business.

Another reason not to amortize goodwill, according to FASB, is that it is not a wasting asset. Mathieson and McConnell disagree on whether it is, but both favor impairment testing. McConnell believes goodwill is a wasting asset because it has a definite life. How will a company assess the impact of a potential acquisition on its balance sheet in light of the new FASB standards?

Neis, vice-president, treasurer and CFO of Life Care Services LLC, a privately held company in Des Moines, Iowa, whether it was wise to proceed with a potential acquisition, he focused on the projected cash flows and returns to the shareholders, concluding that the company should make the acquisition regardless of the impact on financial statements. The new rules have important implications for financial reporting.

In many instances, companies and auditors may struggle to value existing goodwill. Analysts no longer will need to factor in accounting differences between companies that applied purchase rather than pooling accounting to past acquisitions. But analysts will face the challenge of recognizing when the goodwill asset is wasting and being replaced by internally generated goodwill compared to instances in which value remains related to past business acquisitions.

As companies undertake their future business combinations subject to the new requirements, auditors, finance professionals, regulators, analysts and investors will judge the difficulty and effect of implementing a very different accounting methodology. Making the right moves now can help you mitigate any surprises heading into Worldwide leaders in public and management accounting.

Toggle search Toggle navigation. Breaking News. The standards are a radical change, and management accountants, auditors and financial executives must understand and work with a very different accounting process. His e-mail address is moehrle umsl.

However, the pooling method will continue to be used to account for certain business combinations initiated prior to the issuance of the final Statement. Since , the Financial Accounting Standards Board has been the designated organization in the private sector for establishing standards of financial accounting and reporting. Those standards govern the preparation of financial reports and are officially recognized as authoritative by the Securities and Exchange Commission and the American Institute of Certified Public Accountants.

Such standards are essential to the efficient functioning of the economy because investors, creditors, auditors, and others rely heavily on credible, transparent, and comparable financial information. We have updated our Privacy Policy. By continuing to use this website, you are agreeing to the new Privacy Policy and any updated website Terms.

About the Financial Accounting Standards Board Since , the Financial Accounting Standards Board has been the designated organization in the private sector for establishing standards of financial accounting and reporting. In the News.