Impact of accounting methods on return-on-assets (ROA): A study of pooling-of-interest versus purchase as used in business combinations

The primary purpose, research question one, of this research is to examine whether new accounting standards for business combinations, FASB Statement No. 141, Business Combinations, and FASB Statement No. 142, Goodwill and Intangible Assets, would provide transparency across financial statements from company-to-company and industry-to-industry. The secondary purpose, research question two, is to validate the claims of pooling-of-interest users who claim that elimination of the pooling method would have a negative impact on their financial earnings, return-on-assets (ROA), and equity prices. The research is founded in the Efficient Market and Momentum theories. Three hypotheses are developed to provide answers for the two research questions. The tests completed are for large-samples using the differences of two means statistics. In compliance with generally accepted accounting principles (GAAP), most companies report their M&A activity in consolidated financial statements. As a result, a secondary data sample of 900 mergers and acquisitions (M&A) is acquired from Mergerstat, Inc. In order to correct the left skewness found in the sample, median ROA, rather than, mean ROA is used.; The testing concluded that pooling method users always experienced a higher median ROA compared to purchase method users. The first two hypotheses find that transparency can be achieved, however, not without future challenges by pooling users unless certain compromises by FASB are made. The results from the third hypothesis test indicated that the median ROA for pooling method users could be higher when compared to the same sample converted under the purchase method. The results validated the claims of pooling method users that indicated conversion to the purchase method would have an negative impact on financial earnings, equity prices, and ROA. The Financial Accounting Standard Board (FASB) issued the Statement No. 141 & 142 with compromises. The compromise included elimination of goodwill amortization and replacing amortization with recording goodwill impairment when realized.; In conclusion, the compromises offered by FASB will insure that the new standards will continue to provide transparency of financial statements for indeterminable future.