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Technology Stocks : THQ,Inc. (THQI) -- Ignore unavailable to you. Want to Upgrade?

To: Jeff Bond who wrote (9531)	2/1/1999 4:04:00 PM
From: Kory	Respond to of 14266

Jeff, WARNING - Boring accounting stuff below. It's been a while since I went through pooling vs. purchase, but I'll give you a high angle view here. This is not a new issue - it was a hot topic for accountants for a long time. The resurfacing is due to the amount and size of deals being done recently. At present, FASB officially does not prefer pooling or purchase accounting for acquisitions. There are clearly defined hurdles which a company has to pass to warrant pooling If these conditions are not ALL met, the acquisition must be accounted for as a purchase. The main difference is that in a pooling, all the assets, liabilities, and equities are added together, with NO goodwill being created. There is technically no acquiring company or acquiree - it is a combination of businesses and balance sheets. A purchase, on the other hand, requires a re-valuation of all the acquiree's net assets, with any additional premium paid being put into goodwill. In the past 5-6 years, with the huge premiums (usually in stock) that companies pay to acquire other companies, goodwill amounts are, or would be, huge. Most companies hate goodwill because it is a charge they have to write it off against profit for up to the next 40 years. In many cases, this can break a deal since the charges could drive companies into very low reported profits or negatives. So companies that are forced to use purchase accounting needed a loophole (ala THQ's purchase of GameFX). So, the immediate write-off of "in process R&D" became the thing to do. Basically, the normal industry "sequence of desire" is this. 1) Want to combine with no goodwill or write-offs (i.e. pooling) 2) If #1 is not possible, write-off as much of the goodwill immediately, rather than taking a hit every quarter (i.e. in-process R&D charges). 3) If can't do #2, you are stuck with goodwill and quarterly write-offs. In reality, it does not affect the economic essence of the deal. In THQ's case, what happened is that THQ diluted the existing shareholders to own GameFx's technology. Whether you run that "cost" through the P&L in the form of goodwill, a one-time charge, or never, the effect is the same. GameFx received a proportion of the combined companies based on a formula struck when the acquisition was done. The bottom line is that the FASB has really never liked "pooling". It's use has been restricted, and it avoids any re-examination and revaluation of assets. But I really don't think that the FASB will eliminate pooling. Industry likes it and there is a long history of its use. Kory

To: Jeff Bond who wrote (9531)	2/1/1999 5:06:00 PM
From: AreWeThereYet	Read Replies (1) \| Respond to of 14266

I am not an accountant but here is my thought about POI vs Purchase: Kory has already show us how POI/Purchase works wrt to the books. POI is the prefer way if the two companies are both similar size or very large. Purchase method is usually happen when a big company buyout a small company. eg) Cisco take-over XYZ Boardband Inc. for 10 million. I could be wrong, I believe NOL (if any) cannot carry forward with the Purchase method, it has to be "write-off". For POI, there is merger related charge too, the prefer way is to write-off as much and as soon as possible if permit. So it won't affect future earnings. That's about all I can say, hope it won't confuse you :o) aC