CFA Practice Question

There are 334 practice questions for this study session.

CFA Practice Question

Which of the following statements comparing acquisition and pooling of interests methods is incorrect?

I. Acquisition method tends to report higher assets values than pooling because of the adjustment to market value and the recording of goodwill.
II. Acquisition method tends to report lower earnings than pooling because of the excess depreciation and amortization charges under purchase rules.
III. Depreciation charges will be greater under the acquisition method than under the pooling method over the remaining useful lives of the depreciable assets if the market values of depreciable assets exceed book values at the acquisition date.
IV. The future sale of any acquired company assets will normally produce a greater gain under the acquisition method since the assets are carried at lower pre-combination book value.
Correct Answer: IV

User Contributed Comments 5

User Comment
alai2008 The IV is false because one on the main points of the acquisition method is that the adquirer records the assets at fair value.
czar Why is ll correct?
PJMOHAN The effect of the pooling of interest method and the effect of the companies not having combined at all is the same. So visualize if the companies had not combined at all!!
Under the acquisition method, depreciation/amortization is based on the historical cost (book value) of acquirer's assets and the fair value of the targets assets. So depreciation would be higher for acq. method than for pooling of interest method.
gregsob2 depreciation is higher yes, but so is revenue. earnings are the same under all 3 methods (equity, %conso & acqui)
davidt876 gregsob.. none of what u just said is right..

1. revenue
a. pooling method vs acquisition method - no difference in revenue, in both cases the revenues are just added together.

b. proportional consolidation(PC) vs equity - PC's revenue is higher because it adds all the items in both the investor's and investee's P/L's (proportionally adds the investee's items of course). equity method only includes a single line for % of the investee's net income and therefore reported revenue is lower.

2. depreciation (and effect on earnings):
a. pooling vs acquisition

pooling - the independent P/Ls of both companies are added so no effect on depreciation

acquisition - involves revaluing all the newly acquired assets at FV, but the depreciation years don't necessarily change. if FV>BV, then depreciation cost per year increases for the acquired assets, and earnings therefore decreases. but if FV<BV, then depreciation cost decreases and earnings increases. (notice III has to state FV>BV to be true)

b. equity vs proportional consolidation - in the equity method the acquired assets don't make it onto the balance sheet at all so no effect on the overall depreciation. and in PC method the assets are brought onto the balance sheet at BV, so again no effect on depreciation... therefore no difference in earnings
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