The article cites a study that proposes alternative methods of accounting for business combinations. Controversy over the accounting for business combinations continues unabated and promises to increase despite the impending issuance by the Accounting Principles Board of a new pronouncement on the subject. This paper develops an illustration suitable for classroom use to contrast the effect of each method on the post-combination financial statements and market price of stock. Assume that Akquirer Corp. and Zeller Corp. decide to combine in order to achieve operating cost reductions of $800,000 before taxes. The combination is effected through an exchange of common stock. Under the purchase method of accounting for business combinations, the net assets of Zeller are reported by Akquirer at current cost-- that is, at the fair value of such other considerations or the fair value of the property acquired, whichever is more clearly evident. The fact that those receiving stock in payment for the goodwill element of their business share in the excess earnings of the continuing business when they materialize later does not alter significantly the basic transaction. Perhaps the most important point of this paper is to note that the choice of methods of accounting for business combinations often affects the terms under which combinations are consummated and, indeed, often determines whether or not the combinations occur in the first place.

Illustrates the effects of both the purchase and pooling of interests methods of accounting for business combinations on post-combination financial statements. General rule for combining stockholders' equity accounts under the pooling of interests method; Exceptions to the general rule.

Reviews the book "Financial Reporting and Changing Prices: The Conference," edited by Paul A. Griffin.