There you can often find accounting legerdemain that would make Siegfried and Roy blush. The issue here is the treatment of a merger-related expense called goodwill , or the difference between what the acquiring company pays and the book value of the company it's buying. In the case of technology companies whose value lies mostly in ideas, patents, and other intellectual capital, a significant chunk of the purchase price is often goodwill. Under the pooling method, the books of the two companies are simply added together, and no goodwill is created at all. In essence, the merger is free.
Technology companies love pooling, because it makes their future earnings look better.
Theoretically, pooling is only allowed for mergers of equals, but its use has become increasingly common in recent years as companies do everything they can to avoid goodwill charges. For example, networking giant Cisco CSCO has used pooling with many of the smaller companies it has gobbled up over the past few years, avoiding billions of dollars in goodwill charges. Since Cisco used pooling instead, this potential goodwill was neatly avoided. When one company buys another, the target company will usually have spent money on research that will never be used. But U.S. accounting regulators are threatening to eliminate both methods, because goodwill is a real expense that should be accounted for somewhere.