Berkshire Annual Letter 1999 (Part 2)
When an acquisition takes place, there are two generally accepted accounting principles (GAAP) methods of recording the transaction.
In the “purchase” method, a goodwill account has to be established and subsequently written off against earnings. Payment can be made in either cash or stock.
In the “pooling” method (which is usually preferred by management because no goodwill account is required), stock must be the currency.
Managers employ the fiction of pooling to prevent goodwill charges. This concept does not treat the merger of two entities as a purchase of the smaller entity.
No goodwill is generated, and subsequent charges to earnings are eliminated. The accounting is handled as if the businesses had forever been one unit.
The truth of it is that no matter how the deal is structured, there is always an acquirer and an acquiree.
At Berkshire, a procedure is always followed to maximize the cash produced for their shareholders.
Occassionally, less than optimal structures have to be used because the sellers insisted on a certain structure.