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Purchase versus Pooling in Stock-for-Stock Acquisitions: Why Do Firms Care?


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  • Kasznik, Ron

    (Stanford U)

  • Aboody, David

    (U of California, Los Angeles)

  • Williams, Michael
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    The accounting for business combinations has long been one of the most controversial financial reporting issues, generating numerous opinions and interpretations by the American Institute of Certified Public Accountants (AICPA), Financial Accounting Standard Board (FASB), Securities and Exchange Commission (SEC) and the Emerging Issues Task Force (EITF). At the center of the controversy is the principal established in 1970 by Accounting Principles Board Opinion (APBO) No.16 that both the purchase method and the pooling-of-interests method are acceptable in accounting for business combinations. The distinction between purchase and pooling relates mainly to how the difference between the price paid for the common shares of the acquired company and the book value of its net assets (herein referred to as the "step-up") is accounted for on the consolidated financial statements. Under the pooling method, the step-up is not recognized and the net assets of the acquired company are combined with those of the acquiring company at their book values as though the two companies had always been a single enterprise. Under the purchase method, the acquiring company recognizes the differential by restating all assets and liabilities of the acquired company to their fair values. Consequently, the additional depreciation and amortization expense arising from the asset write-up often associated with the purchase method leads to post-merger earnings that can be substantially lower than those reported under the pooling treatment.

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    Bibliographic Info

    Paper provided by Stanford University, Graduate School of Business in its series Research Papers with number 1614.

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    Date of creation: Jan 2000
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    Handle: RePEc:ecl:stabus:1614

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    Postal: Stanford University, Stanford, CA 94305-5015
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    Cited by:
    1. Garcia, Clemence, 2007. "How Accounting for Goodwill relies on Underlying Assumptions : a Historical Approach," Economics Papers from University Paris Dauphine 123456789/2638, Paris Dauphine University.
    2. Richardson, Scott & Tuna, A. Irem & Wysocki, Peter D., 2003. "Accounting for Taste: Board Member Preferences and Corporate Policy Choices," Working papers 4307-03, Massachusetts Institute of Technology (MIT), Sloan School of Management.
    3. Tomaso Duso & Klaus Gugler & Burcin Yurtoglu, 2006. "Is the Event Study Methodology Useful for Merger Analysis? A Comparison of Stock Market and Accounting Data," CIG Working Papers, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG) SP II 2006-19, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG).
    4. Gao, Ning, 2011. "The adverse selection effect of corporate cash reserve: Evidence from acquisitions solely financed by stock," Journal of Corporate Finance, Elsevier, Elsevier, vol. 17(4), pages 789-808, September.
    5. Robin Wilber, 2007. "Why do firms repurchase stock to acquire another firm?," Review of Quantitative Finance and Accounting, Springer, Springer, vol. 29(2), pages 155-172, August.
    6. Skinner, Douglas J., 2008. "Discussion of "The implications of unverifiable fair-value accounting: Evidence from the political economy of goodwill accounting"," Journal of Accounting and Economics, Elsevier, Elsevier, vol. 45(2-3), pages 282-288, August.
    7. Dos Santos, Marcelo B. & Errunza, Vihang R. & Miller, Darius P., 2008. "Does corporate international diversification destroy value? Evidence from cross-border mergers and acquisitions," Journal of Banking & Finance, Elsevier, Elsevier, vol. 32(12), pages 2716-2724, December.


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