From an accounting perspective, mergers and acquisitions have to be reported in a consistent and comparable manner, and sufficient information should be provided to enable financial statement users to predict the future performance and forecast cash flows of the combined entity.

Companies eager for fast growth are looking at the Merger and Acquisition (M&A) mode. According to a data published by Mergerstat, the volume of M&A transactions in the US during 2004 was $777 bn-a 43% increase over 2003.

Until recently, companies had a choice of accounting methods for M&As. Under one method; pooling of interests, goodwill resulting from acquisition was not recorded in the financial statements and therefore not amortized or evaluated for impairment. The actual value of consideration paid for the acquisition is not reflected in the financial statements of the acquiring entity.

M&A, which does not meet the criteria required to apply the pooling of interest method, was accounted under the purchase method of accounting. The fair value of consideration was compared with the fair value of assets and liabilities acquired, and the excess of consideration over net assets acquired was recorded as goodwill. The goodwill is reviewed for impairment at periodic intervals.

The dual method provides incentives for accounting arbitragedramatically different financial statement results for economically similar transactions. This also impacts the comparability of financial information of similar transactions accounted under different methods.

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