Some Accounting Problems In Business Combinations
BY JOHN S. SCHUMANN Partner, Los Angeles Office
Presented before the Los Angeles Chapter downtown group of The California Society of Certified Public Accountants—October 1958
THERE have been an unusually large number of mergers in the United States during the last ten years and an accompanying sharp interest has been taken by management in the related accounting
problems. Certainly management of a surviving enterprise has an understandable interest in the method of recording this important transaction and in its effect on the reporting of future operations.
One accounting problem—in many cases the very basic problem —revolves around whether one of the combining corporations is looked upon as the very senior member of the constituent organizations,
the others being, in effect, purchased by that dominant member,
or whether all constituents are considered important to a joining of forces—a pooling of interests—in continuing businesses. The method of recording the combination will depend upon which of the two views—purchase or pooling—is adopted.
The conventional textbook approach to accounting for a combination
of corporations has been to consider that the properties of each are received by the survivor in a transaction we speak of as a purchase. In that type of transaction—a purchase—the accounting is based upon the fair values of the properties, whether cash, surviving
corporation's capital stock, or other property is exchanged. And, the transaction being a purchase, previously accumulated details
of the source of net assets of the purchased companies become unimportant. Inventories, operating properties, and all other assets, including troublesome goodwill, are recorded at the amount computed
as having been paid for them by the survivor—just as in any other purchase—and if issue of the survivor's capital stock is the consideration, net asset values at the computed fair value or cost figure are reflected entirely as paid-in capital.
However, if the merger transaction is made not as a purchase but as a pooling of interests the accounting is different. Here the carrying values of the properties of the old companies are carried forward in the accounts of the survivor, and the previously maintained
distinction between paid-in capital and retained earnings is continued. True, it might be necessary to transfer amounts between