Study Of The Business Combination Accounting

Business combinations have caused a series of problems to financial accounting, such as how to recognize the purchase cost, how to measure goodwill, and how to choose accounting methods and theories.Before any accounting treatment is made, accountants should make sure that a certain criteria is met, that is whether an entity can effectively control another entity. After that, accountants can decide which accounting method and theory (if necessary) to be chosen.There are three kinds of accounting methods for business combinations, which are the purchase method, the pooling of interests method and the fresh-start method. The last one has never been used in practice yet; the second one is used under strict conditions; and the first one is used in every comer of the world. We should use the purchase method in all combinations. Firstly, the pooling of interests method may produce a huge amount of "instance income" which isn't real income. The "instance income" would leave a chance for the managers to manage their reported income and it would disturb the investors' analysis and decisions and decrease the investors' return. And evidence has been found in the case study. Secondly, the use of pooling method would impair accounting information's comparability. Furthermore, the pooling of interests method has been prohibited in Australia, Canada and the United States. And IASC is going to eliminate it.There are three kinds of combination theories: the parent-company theory, the entity theory and the contemporary theory. The parent-company theory and the contemporary theory only serves for the interests of the majority shareholders of the parent company, but they neglect the minority shareholders' interests. Though the parent theory is popular currently in the world, it is going to be replaced by the entity theory. We suggest that the entity theory should be used in China.The case of Yasheng merging Longxi provides us a good chance to analyze the choice of accounting methods for business combinations. The pooling method may misguide the investors' decision and motivates the mangers to manage the earnings. Based on the analysis of the case we suggest that the pooling method should be banned in China.