Contemporary issue in financial reporting Case Study

Contemporary issue in financial reporting - Case Study Example Due to the afore-mentioned factor, Microsoft can find the combination of balance sheets more useful in acquiring Yahoo, as it is an online Company. One more aspect that is useful for Microsoft in Pooling of interest method, it does not result in creation of goodwill. This leads to report higher earnings. (Answers.com, 2008) Thanks for giving us a chance to advise you on adoption of 'pooling interest' method. So that we can let you know, why it is beneficial for a company trying to acquire another, while you are contemplating to acquire Yahoo Corporation. While acquiring a company a firm follows one of the two methods. The first one is pooling of interest and the other is purchase method. The later involves the goodwill, which is a premium for buying a business. The goodwill is a result of subtracting purchase price from its book value. However, this is not advisable as Microsoft is trying to acquire Yahoo for more than the book value and this may result in negative goodwill according to purchase method. Hence, pooling of interest method is advisable for acquisition of Yahoo, for reporting higher earnings and a probable resultant higher share price. (About.com , 2008) When we consider the situation of Microsoft taking over Yahoo.com, let us take into consideration the earnings of both the companies at the end of 2007. The earnings of Microsoft at the end of 2007 is $11,030 and that of Yahoo is $1,403. Let us suppose that the book value of Yahoo's share is $10. Microsoft is contemplating to pay $32.5 per share. If it happens, the company has to pay $ 227987.5 million. However, the book value of Yahoo shares is $ 70150 million only. The difference is $ 157837.5 million. This will be termed as good will if Microsoft follows the purchase method and needs to be amortised in 40 years by amortising 1/40th part of the earnings every year. (Microsoft, 2008) If the company follows pooling interest method, there is no need of showing good will and the resultant company's balance sheet is the combination of balance sheets of two companies before acquisition. If the Book value of Yahoo share is $10 then the total book value of 7015 million Yahoo shares equal to $7.0150 billion. However, Microsoft has to pay $ 22. 8billion. The difference is $ 15.785 billion. (Ad vision, 2008) This has to be amortised in the resultant entity within 40 years according to purchase method. In Pooling of Interest method, there is no way to consider the goodwill as the company pays the amount to the investors and the balance sheets are combined from word to word and value to value. This reports the higher earnings and in the future years and allows higher earnings per share resulting in a higher share price in the market, which is not possible with purchase method as every year 1/40th part of the earnings cannot be included in reporting the earnings. A company like Microsoft, which have enough reserves of cash do not need the amortisation and can concentrate on For example, when we consider, the earnings of Microsoft and Yahoo in the year of 2007, the number of shares in Microsoft is 9848 million and the number of sha