The Effect of Fair Values and Historical Costs on Accounting for Business Combinations.

Abstract Several textbooks state or imply that higher reported postcombination earnings results under pooling accounting than under purchase accounting. But this outcome presupposes an economic environment characterized by increasing asset fair values. This article demonstrates that in an economic environment of increasing asset fair values, higher reported postcombination earnings usually results under pooling accounting, but that in an economic environment of decreasing asset fair values, higher reported postcombination earnings often results under purchase accounting, even if goodwill is recognized. Thus, the economic conditions of the acquired company at the combination date determine which accounting method results in higher postcombination earnings, not the recognition or nonrecognition of goodwill per se.