Should Merger Accounting be Reconsidered?: A Discussion Based on the Chinese Approach to Accounting for Business Combinations

Università degli Studi di Brescia Working Paper No. 91

43 Pages Posted: 19 Nov 2008 Last revised: 5 Dec 2012

Charles Richard Baker

Adelphi University - School of Business

Yuri Biondi

French National Center for Scientific Research (CNRS)

Qiusheng Zhang

School of Economics and Management, Beijing Jiaotong University

Date Written: November 17, 2008

Abstract

In 2006, the China Accounting Standards Committee (CASC) issued its Statement No. 20, which permits both the purchase and pooling of interests (or merger) method of accounting for business combinations. The decision of the CASC in Statement No. 20 stands in contrast to the decisions taken by the US Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) which both eliminated the pooling of interests method. As a result of the issuance of CASC 20, along with similar pronouncements by the Japanese standard setters and other standards setting bodies, the goal of harmonizing international accounting standards has been faced with a lack of convergence in the area of accounting for business combinations. In this paper we examine the reasons for this lack of convergence in order to develop a reconciled framework. In particular, the Chinese standards setters have sought to develop an approach to accounting for business combinations which distinguishes between instances where the combining entities are under common control or not under common control. Using a relatively narrow definition of common control, both the FASB and the IASB have excluded business combinations among entities under common control from the scope of their respective pronouncements. The purpose of this paper is to analyze the reasons for the distinctly different approach taken by the Chinese accounting standards setters by comparing the provisions of FASB 141, IFRS 3 and CASC 20. Our analysis will show that the technical differences between the standards are based on different understandings of the underlying economics of business combinations (Anthony, 1987), which leads in turn to different representations of the combination process. We believe that a forthright recognition of these differences may lead to a reconsideration of the pooling of interests and merger methods in a new comprehensive framework.

Keywords: business combinations, mergers and acquisitions, purchase method, pooling of interests method, international accounting convergence, fair value accounting model, historical cost accounting model

JEL Classification: G34, M41, M44, M47, O16

Suggested Citation

Baker, Charles Richard and Biondi, Yuri and Zhang, Qiusheng, Should Merger Accounting be Reconsidered?: A Discussion Based on the Chinese Approach to Accounting for Business Combinations (November 17, 2008). Università degli Studi di Brescia Working Paper No. 91. Available at SSRN: https://ssrn.com/abstract=1303636 or http://dx.doi.org/10.2139/ssrn.1303636

Charles Richard Baker

Adelphi University - School of Business ( email )

1 South Avenue
Garden City, NY 11530
United States
516-877-4628 (Phone)

Yuri Biondi (Contact Author)

French National Center for Scientific Research (CNRS) ( email )

IRISSO - University Paris Dauphine PSL
Place Marechal Lattre Tassigny
75016 Paris
France

HOME PAGE: http://yuri.biondi.free.fr/

Qiusheng Zhang

School of Economics and Management, Beijing Jiaotong University

No.3 of Shangyuan Residence Haidian District
Beijing
China

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