Business combinations and fair value

Historically two methods were accepted to account for business combinations : pooling and purchase method. In the pooling, the carrying values of assets and liabilities remain unchanged and no goodwill is recognized. The purchase method is consistent with the historical cost model even if the assets and liabilities acquired are measured at fair value : the acquired entity is measured at its cost. Such cost is allocated to assets and liabilities on the basis of their fair values, any residual amount being recognized as goodwill. The two methods produce quite different results and have a major impact on subsequent balance sheet and performance. So, standard setters have decided to eliminate pooling. Recently, FASB and IASB have started a joint project to move the purchase method from the historical cost model to the fair value model. Such project will have to be carefully analyzed to evaluate benefits for the users and complexities and disadvantages for the preparers. JEL classifications : G34, M41Thouvenin Dominique. Business combinations and fair value . In: Revue d'économie financière (English ed.), n°71, 2003. Fair Value. pp. 73-82