A new accounting standard came into effect at the beginning of July that streamlines how mergers and acquisitions are reported, by eliminating pooling of interests.

A second new standard will see the replacement of amortization of goodwill by an impairment approach, which will reflect any decreases in fair value.

The changes are the result of collaborations between the Accounting Standards Board in Canada and its U.S. counterpart, the Financial Accounting Standards Board. They require all combinations in Canada and the United States to be accounted for using purchase accounting rules from July 1, meaning a clearer, more consistent standard for both countries.

The new standards eliminates a discrepancy between combination practices in Canada and the U.S. that has equally frustrated investors, the accounting profession and the companies involved in combinations.

In the U.S., mergers and acquisitions often qualified for pooling of interests accounting, where book values of two supposedly equal companies were combined, even when one of the companies participating was clearly leading the acquisition. By contrast, in Canada pooling was rare and virtually all combinations here have been accounted for using purchase accounting rules, which are based on fair value of the companies involved.

By eliminating pooling of interests altogether, the U.S. standard comes closer to the Canadian standard that was already in existence. “The new standard on business combinations levels the playing field between the two countries,” said Paul Cherry, chair of the Accounting Standards Board. “By subjecting all combinations to purchase accounting rules, investors and the marketplace will be armed with more credible and comparable financial information.”

“In the vast majority of cases, pooling is an illusion, because a clear acquirer can almost always be identified,” said Cherry.

The AcSB and the FASB began working on a harmonized standard in 1998. In addition to eliminating pooling, a new standard on goodwill and other intangible assets does away with amortization of goodwill, in favour of an impairment approach. Amortization of goodwill will cease depending on the year ends of individual companies. For companies with calendar year ends, amortization of goodwill will cease on January 1, 2002.

“With an impairment approach, companies are required to test the recoverability of goodwill at least once a year, and write downs will generally be required to reflect any decreases in fair value,” said Cherry.