Difference between pooling and purchase accounting?

• A. Under pooling, new equity is valued at market price and assets are not revalued
• B. To qualify for pooling, an acquisition must be financed entirely with the stock of the bidding firm, and the book values of assets are aggregated with new equity valued at book value; market price paid is not considered
• C. Pooling accounting records goodwill equal to the excess of market value over book value
• D. Pooling is the same as purchase accounting

Answer: (B)

The concept being tested is how pooling of interests differs from the purchase method in mergers and acquisitions. Pooling is treated as if the two firms have always been one; the merger is financed entirely with the acquiree’s stock, assets and liabilities are combined at their existing book values, and no goodwill is recorded because market values aren’t brought into the accounting. In contrast, purchase accounting records the acquired assets and liabilities at their fair values on the acquisition date and recognizes goodwill if the consideration exceeds those net asset values.

The option states that to qualify for pooling, the deal must be financed entirely with the stock of the bidding firm, and the assets’ book values are aggregated with new equity valued at book value; market price paid is not considered. This captures the essence of pooling: stock-financed, book-value values, no market-based revaluations or goodwill.

Why the other ideas don’t fit: pooling does not value new equity at market price, nor revalue assets at market prices, and it does not record goodwill. Also, pooling is not the same as purchase accounting, which does involve fair-value revaluations and goodwill recognition.