Management's Choice to Purchase or Pool.

Abstract In his recent article on "Distinguishing Between Purchase and Pooling", (Journal of Accountancy, June 1961) Samuel R. Sapienza stated: Finally, the nature of the accountability for the combination is clearly dependent upon the prior factors as it, in itself, would be an insufficient cause to distinguish a pooling from a purchase. Thus, accountability is a dependent variable. If by this is intended a statement of what theoretically is correct or of what should be the case in actual practice, then there is every indication that accounting theory has been unjustifiably flouted in this area. The two different types of case analysis employed in this paper strongly indicate that great importance in actual practice is attached to the income and asset effects of the alternative accounting treatments of business combinations. At the very least, the study of St. Regis indicates the extent to which the pooling treatment leads to favorable operating results as compared with the purchase treatment. At most, that analysis plus the analysis of the bargain purchase cases indicates that management usually has a genuine choice of whether to pool or to purchase, and that the choice is made on the basis of that method which will give the most favorable results. Enough information is not available to allow a fuller exposition of that conclusion, but on the other hand the cases cited certainly show that the choice actually made by management was not the unfavorable one. The bargain purchase cases go further than the study of the income effects of St. Regis' poolings in showing the flexibility in the choice made by management to pool or to purchase, and in showing that management's decision is based on the effects of the alternative treatments. But the study was not completely sufficient, nor was this intended, to demonstrate that the accounting effects of the alternative treatments were the sole consideration in determining the treatment itself.