An analysis of accounting for business combinations from decision-usefulness and accountability perspectives

The Financial Accounting Standards Board has issued an Exposure Draft (ED) that would eliminate the use of the pooling method of accounting for business combinations (FASB 1999a, 2001). The Exposure Draft provides several rationales for the proposed changes to the accounting treatment of business combinations. This paper examines these rationales from two perspectives, namely, decision-usefulness and accountability. Decision-usefulness is currently the basis for standard setting under the FASB's Conceptual Framework. The concept of accountability, as defined in Ijiri (1983) and Williams (1987), forms an alternative basis for providing direction for financial reporting.The paper provides an empirical evaluation of the two methods used to account for business combinations (pooling-of-interests and purchase) from the decision-usefulness perspective. The results of this study suggest that the purchase method provides information that may be more useful to the investor in determining firm value. The analysis from the accountability perspective provides important insights because it considers the viewpoint of the variety of constituents that may be impacted by the accounting standard, and illustrates how this perspective may enable standard setters to gain insights that may not be evident from the decision-usefulness perspective.