Business combinations;

              Accounting Research
BULLETINS
•
Issued by the
Committee on Accounting Procedure, American Institute of Accountants, 270 Madison Avenue. New York 16, N. Y.
Copyright 1950 by American institute of Accountants
1. Whenever two or more corporations are brought together, or combined, for the purpose of carrying on in a single corporation the previously conducted businesses, the accounting to give effect to the combination will vary depending upon whether there is a continuance of the former ownership or a new ownership.1 This statement has been prepared (a) for the purpose of differentiating between these two types of corporate combinations, the first of which is designated herein as a pooling of interests and the second as a purchase, and (b) to indi-cate the nature of the accounting treatment appropriate to each type.
2. For accounting purposes, the distinction between a pooling of interests and a purchase is to be found in the attendant circumstances rather than in the legal designation as a merger or a consolidation, or legal considerations with respect to availability of net assets for divi-dends, or provisions of the Internal Revenue Code with respect to in-come taxes. In a pooling of interests, all or substantially all of the equity interests in predecessor corporations continue, as such, in a surviving corporation1 which may be one of the predecessor corpora-tions, or in a new one created for the purpose. In a purchase, on the other hand, part or all of the ownership of the acquired corporation is eliminated. A plan or firm intention and understanding to retire capi-tal stock issued to the owners of one or more of the corporate parties, or substantial changes in ownership occurring immediately before or after the combination, would also tend to indicate that the combina-tion is a purchase.
3. Other factors to be taken into consideration in determining whether a purchase or a pooling of interests is involved are the rela-tive size of the constituent companies and the continuity of manage-ment or power to control the management. Thus, a purchase may be indicated when one corporate party to a combination is quite minor
1 several owners of one of the predecessor companies are not substantially in proportion to their respective interests in the predecessor company, a new ownership or purchase of such company is presumed to result.
299
September, 1950 No. 40
Business Combinations