The article examines the desirability of the existing practices in accountancy for business combinations to determine the accounting problems that arises when a business separation occurs. The primary issue in accounting for divisive reorganizations centers on the propriety of carrying forward the existing basis of accountability for those assets transferred to the new entity versus creation of a new basis of accountability. Since continuity of ownership in the aggregate is maintained in all divisive reorganizations, it could be argued that all are reverse poolings. An aggregate view of ownership, however, fails to differentiate between those divestitures in which there is a division of the firm between owners and those in which ownership is unaltered. In the context of accounting theory there does not appear to be a body of rationale which clearly disproves the validity of either reverse pooling or reverse purchase treatment. It has been argued by those supporting purchase treatment that business combinations are basically exchange transactions bargained between independent entities.

A number of different approaches are being used in reporting investment income from non-consolidated finance subsidiaries. Although finance subsidiaries tend to be fully consolidated when the parent is also a finance company, one non-finance parent in the study also consolidated its finance subsidiary. Of the various methods used in applying the equity method, only Method E (offsetting against interest expense) appears to be related to the circumstantial variables examined. This approach seems to be a novel substitute for consolidation. While other circumstantial variables might be examined, there is nothing to suggest additional variables that might have more explanatory power. In summary, the study indicates that the particular approach to reporting the operations of finance company subsidiaries under the equity method is related to the economic circumstances of the parent and subsidiary in only a few cases. In most other cases, there seems to be little justification for the specific equity-method approach (as distinguished from the equity method in general) used by the companies in the study. This diversity of reporting practices makes financial statement analysis and comparisons between companies much more difficult, especially since the financial statements contain little to clarify the underlying rationale for the procedures used. If a reduction in the number of reporting alternatives is of concern to the Financial Accounting Standards Board or other authoritative bodies, further clarification of the appropriate approach to reporting under the equity method appears to be in order.