Rules on Business Combinations

Eliminates Pooling of Interests

The Financial Accounting Standards Board has voted unanimously to eliminate pooling of interests in favor of purchase accounting as the required method for recording business combinations. The new rule will go into effect when the board issues its final standard, expected in late 2000, after a comment period on a business combination proposal it plans to release early in the third quarter. The new rule will not apply retroactively.

"The board decided that it is hard for investors to make sound decisions about combining companies when two different accounting treatments exist for what is essentially the same transaction," FASB Chair Edmund L. Jenkins said. "We believe that the purchase method of accounting gives investors a better idea of the initial cost of a transaction and the investment's performance over time than does the pooling of interests."

Jenkins said that FASB will reconsider goodwill, including the board's prior decisions on the issue, before issuing its final proposal on business combinations.

Another reason FASB favors the purchase method is to bring the United States in conformity with international standards. Widespread use of the pooling of interests method is largely an American phenomenon.

"The United States not only is out of step with other countries on the pooling versus purchase issue, but domestically we have a great deal of diversity in practice as well," Jenkins said. "Pooling of interests is the exception most everywhere else in the world, and some countries ban the use of it altogether."