hensive income. Foreign currency gains and losses enter into the determination of
comprehensive income, which reflects the premise that they do have economic con-
sequences for the value of an enterprise.
Another accounting method used for foreign currency translation is the temporal
method. Under this method, the financial assets and liabilities are translated at the
current rate. All assets that are stated at historical prices, such as fixed assets and
common stock investments, are translated at the historical rate (i.e., the rate in effect
when the asset was acquired). The principal advantage of this method is that it best
reflects what the balance sheet would have looked like had the company always op-
erated using only one currency. Under this approach, translation gains and losses on
foreign currency–denominated monetary items are recorded in the income statement.
Several countries, and IAS 21, “The Effects of Changes in Foreign Currency Ex-
change Rates,” require the use of the temporal method for integrated foreign opera-
tions.
(h) Accounting for Mergers and Acquisitions (Including Goodwill). The volume of
mergers and acquisitions over the past two decades has risen exponentially. This is
attributed to many factors, not the least of which are the ever-growing appetite for in-
ternational expansion and the recognition of synergies that can be realized. Also, the
relatively high prices at which certain companies have been trading make stock-for-
stock mergers attractive. It seems as if almost every time you pick up a newspaper
there is at least one story about a company merging with or acquiring another com-
pany. The major accounting question that arises is at what value the assets and lia-
bilities of the acquired company should be carried in the consolidated financial state-
ments. In most circumstances, accountants agree that the acquired company’s assets
and liabilities should be carried at their fair value at the date of acquisition. In certain
limited circumstances, however, where the shareholders of the acquired company end
up owning shares of the acquiror, some believe that the acquiree’s assets and liabili-
ties should not be revalued, since the two companies have simply “merged” or
“pooled.”
Accounting principles in Japan, the United Kingdom, Germany, the Netherlands,
and until recently, the United States, all allowed (or required) so-called pooling (unit-
ing) or merger accounting when certain specific criteria are met. However, the con-
ditions vary from one country to another and, depending upon which country’s
GAAP are applied, a given transaction may be accounted for as either a purchase-ac-
quisition or a pooling-merger. For many years the criteria for using pooling account-
ing in the United States were considered to be much more stringent than the criteria
in the United Kingdom. However, in 1994, FRS 6, “Acquisitions and Mergers,” was
issued in the United Kingdom. Among other things, FRS 6 introduced stringent cri-
teria that must be satisfied before merger accounting can be used, and included within
these criteria is the requirement that the relative sizes of the parties must not be so
disparate that one party dominates the other by virtue of its size. A similar criterion
is contained in IAS 22, “Business Combinations,” which was revised in 1993 and
- The size test requirement was perceived to be extremely restrictive when FRS
6 and IAS 22 were issued and subsequently led the SEC in the United States to re-
vise its reconciliation requirements to the effect that a non-U.S. issuer that complies
with the criteria in IAS 22 may deem an acquisition under IAS 22 to be an acquisi-
tion for the purposes of its reconciliation to U.S. GAAP, notwithstanding that it may
meet the U.S. pooling rules. Similarly, a pooling under IAS 22 would be deemed a
12 • 20 SUMMARY OF ACCOUNTING PRINCIPLE DIFFERENCES