Volume 6, No. 9

What's Wrong With Business Combination Accounting: A Primer:  When one company acquires another company, a simple-minded observer would expect that there is only one way to account for the transaction - and such an observer would expect that the value of the acquisition transaction would be visible in the financial statements of the acquirer. Life isn't so simple when it comes to business combination accounting. Over the years, various ways to account for mergers and acquisitions have been developed, which show the economics of combination transactions with varying degrees of reality. The apparent goal of most acquirers has been to obscure the value of an acquisition through the use of pooling accounting or some variant of purchase accounting. Most of the offbeat accounting procedures used are native only to American enterprises; as the FASB sets its sights on a project to reconsider the existing business combination rules, it will likely be paying much attention to methods used in other countries for these kinds of transactions. In recent years, domestic firms have been enchanted with the concept of "international harmonization" of standards - but they may find that harmonization is a harsh mistress. That mistress may be dishing out some tough love if, in the name of international oneness, the Board changes some of the more liberal rules for business combination accounting. What follows here is a compendium of current business combination accounting issues which should be of use to analysts, and some handicapping on the fate of such practices.

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