Full Answer Section

Changes made to accounting methods over a period

The accounting methods for mergers have evolved over time. The pooling-of-interests method was the most common method of accounting for mergers until the early 1970s. However, the pooling-of-interests method was discontinued because it was considered to be too lenient and did not provide investors with a clear picture of the financial impact of a merger.

The purchase method is now the most common method of accounting for mergers. The purchase method requires the acquiring company to record the assets and liabilities of the acquired company at their fair market value. The purchase method also requires the acquiring company to recognize goodwill, which is the excess of the purchase price over the fair market value of the acquired company’s net assets.

Current methods of accounting as per IFRS standards

The International Financial Reporting Standards (IFRS) also require the purchase method to be used for accounting for mergers. However, IFRS also allow for the use of the reverse acquisition method in certain circumstances. The reverse acquisition method is used when the acquired company is the larger of the two entities involved in the merger.

Are existing methods of accounting based on accounting theory or accounting practice?

The existing methods of accounting for mergers are based on both accounting theory and accounting practice. Accounting theory provides the foundation for the accounting methods, but accounting practice also plays a role in determining how the methods are applied.

Are there any issues with the existing practice and suggestions for improvement?

There are some issues with the existing practice of accounting for mergers. One issue is that the purchase method can result in the creation of goodwill, which is an intangible asset that can be difficult to measure and quantify. Another issue is that the purchase method can lead to volatility in the earnings of the acquiring company, as the value of goodwill can fluctuate over time.

Some suggestions for improvement include using a modified purchase method that would reduce the amount of goodwill created and using a fair value accounting approach that would more accurately reflect the financial impact of a merger.

Conclusion

The methods of accounting for mergers are important because they affect the financial statements of the acquiring and acquired companies. The choice of accounting method can have a significant impact on the reported earnings and assets of the combined entity. The existing methods of accounting for mergers are based on both accounting theory and accounting practice. However, there are some issues with the existing practice, and some suggestions for improvement have been proposed.