Dr. M. D.

Chase Long Beach State University

Advanced Accounting-133 Pooling of Interest: Summary and Illustration Page 1

I. COMBINATION BY POOLING OF INTEREST

A. Why we care about pooling: Companies that merged IAW (in accordance with) the pooling requirements outlined below prior to SFAS 141 are
permitted to continue to account for there merger under the pooling rules.
B. Background: Pooling of Interest was eliminated as an accounting option for business consolidations by SFAS 141 in 2001. Up to that time,
companies that met the pooling criteria (explained below) could elect to account for combinations as a pooling as opposed to a purchase.
i. Why Pooling was eliminated as an accounting option: In theory poolings were intended to account for mergers between companies of similar
size and purpose…this was rarely the case; the real purpose was to increase reported income by reducing expenses (depreciation was
lower because assets were carried forward at old cost basis as opposed to FMV (new cost basis).
C. Key Differences Between Purchase Accounting and Pooling:
i. In purchase accounting acquired assets are booked at full cost (Fair Market Value);
1. Purchased goodwill was recognized (prior to SFAS 142 in 2001, goodwill was amortized over 40 years or less)
ii. In a pooling, assets are booked at the value at which they were carried on the target companies books;
1. Because the acquisition was not a purchase (and goodwill can only be recognized when purchased) no goodwill was recognized in
poolings.
D. Criteria for Pooling:
i. ATTRIBUTES OF THE COMBINING COMPANIES:
1. Each of the combining companies is autonomous and has not been a subsidiary or division of another corporation within two years before
the plan of combination is initiated except if one of the companies is a subsidiary that is "spun-off" pursuant to a governmental
divestiture order or a new company that acquires assets that must be disposed of.
2. Each of the combining companies is independent of the other combining companies at the date the plan of combination is initiated. The
combining companies can own no more than 10% of each others outstanding voting common stock from beginning to end of the
combination. This computation must be made on an 'equivalent shares' basis if the exchange of stock is not one for one. The
computation of “equivalent shares” is explained in detail in section 8C of this text.

ii. MANNER OF COMBINING EQUITY INTERESTS:

1. The combination must be effected in a single transaction OR in accordance with a specific plan (not to exceed one year).
2. The 'issuer' company must acquire at least 90% of the outstanding voting common stock of the 'combiner' company in the period
subsequent to the initiation date by an exchange of its voting common stock. Shares acquired PRIOR to the initiation date or shares
acquired for CASH CANNOT BE USED to determine the 90% requirement.
3. None of the combining companies can change its interest in voting stock of the other companies in anticipation of the combination from
two years prior to the initiation of the plan to the consummation of the plan.
4. No company may reacquire more than a normal number of shares of its own stock between the date of initiation and consummation.
5. The ratio of interest of an individual common stockholder to those of the other common stockholders must remain the same.
6. The common stockholders can neither be deprived of nor restricted in exercising their voting rights in the combined corporation.
7. The combination is completed at the date of consummation and there can be no contingencies.

iii.ABSENCE OF PLANNED TRANSACTIONS:

1. The combined corporation cannot agree to retire or reacquire any of the common stock issued to effect the combination
(designed to prevent circumventing ii. 2 above).
2. The combined corporation cannot enter into financial arrangements for the benefit of the former stockholders of a combining
company, such as a guarantee of loans secured by stock issued in the combination, which in effect negates the exchange of
securities because such "bail-outs" are deemed inconsistent with the already shaky concept of pooling of interests.
3. The combined corporation cannot intend or plan to dispose of the assets of the combining companies for two years after the
combination other than disposals in the ordinary course of business.

Note: 1. Students should have a working knowledge of these criteria in order to determine if a business combination is eligible to be
accounted for a pooling of interests
2. It is common for accountants to advise clients on how to structure a combination in order to meet the requirements of a pooling
and/or purchase
Dr. M. D. Chase Long Beach State University
Advanced Accounting-133 Pooling of Interest: Summary and Illustration Page 2

II. COMBINATION BY POOLING OF INTEREST

A. SUMMARY OF PROCEDURES
1. Poolings are always accounted for as if they occurred at the beginning of the accounting period. This means that there can be no
"purchased net income" as in purchase accounting. It also means that the 'issuer' company includes the earnings of the 'combiner'
company for all periods presented.

2. All accounts of the combining companies must be adjusted so that they use the same chart of accounts and GAAP. Adjusting the
accounts to implement a business combination should be made retroactively in accordance with APB 20.

3. The recorded assets and liabilities of the combining companies are added at their book values and the effects of all intercompany
transactions are eliminated.

4. The retained earnings and stockholders equity sections of the combining companies are added and become the retained earnings and
stockholders equity section of the combined company. HOWEVER, if the par value of the stock issued to effect the pooling exceeds the
total paid in capital of the stock on the books of the 'combiner', the following sequence should be used to eliminate the excess of 'issuer'
par over the par of the 'combiner' company:
a. reduce PIC of 'ISSUER'
b. reduce retained earnings of 'COMBINER'

5. Combinations by pooling of interest will NEVER result in goodwill because the combination is at book value.

6. Expenses incurred in pooling are deducted from income of the combined corporation for the period in which the expenses are incurred.
This includes SEC registration costs (note the difference in treatment from a purchase combination).

7. Intercompany bonds are treated as though retired.

8. Treasury stock issued by the acquiring company should be treated as though retired.

9. The effects of intercompany transactions are eliminated.

10. If TREASURY STOCK IS ISSUED, treat as though retired and new shares are issued (make the journal entry to retire the treasury stock)

Note: 1. All adjustments are first made to PIC (Paid in Capital) of issuer, PIC of combiner is not a factor in pooling entries.
2. If debits are required, RE (Retained Earnings) of combiner is only reduced after all available Issuer PIC has been reduced; again, note
that PIC of Combiner is not a factor and is not considered.

This sequence is illustrated below:

--Step 1: Analyze the pooling to determine the makeup of PIC received.

Par issued (Par x number of shares issued)............................................ $ xxx,xxx

Total PIC received: Common stock (Par x number of shares received)................... yyy,yyy

If par issued < PIC received then allocated to issuer PIC (where x-y is negative number). zzz,zzz

I f par issued > PIC received; excess of par issued over PIC received (w=x-y; w is positive) $ www,www
therefore: 1. reduce Issuer PIC (to extent available)........ $ aa,aaa
2. reduce Issuer RE as required to balance (w=a+b) bb,bbb

--Step 2: Record the pooling

Current assets..................................... xx,xxx
Property, plant, and equipment..................... xxx,xxx
Other assets....................................... xx,xxx
** PIC-Issuer (if par issued > PIC received)........ xx,xxx
** PIC-Issuer (par issued < PIC received)........ xx,xxx
Accumulated depreciation...................... xx,xxx
Dr. M. D. Chase Long Beach State University
Advanced Accounting-133 Pooling of Interest: Summary and Illustration Page 3

Accounts payable.............................. xx,xxx

Common stock.................................. xxx,xxx
Retained earnings............................. xxx,xxx
** will not appear simultaneously

Note:1. All adjustments are first made to PIC of issuer, PIC of combiner is not a factor in pooling entries.
2. If debits are required, RE of combiner is only reduced after all available Issuer PIC has been reduced; again, note that PIC of Combiner is not a
factor and is not considered.