Under the current purchase method of accounting, the acquiring company must write off as goodwill a portion of the purchase price of a target company that has not been accounted for by the target company’s tangible assets. This poses a particular problem for high-tech companies, which often have significant intangible assets (such as intellectual property and highly trained personnel) and few solid physical ones. In many high-tech transactions where few tangible assets are involved, much of the purchase price can consist of goodwill. Under current rules such goodwill must be written off periodically against a company’s future earnings, according to a defined schedule, over a specific amortization period of up to 40 years. This naturally decreases a company’s net earnings.

Many firms therefore use the alternative pooling of interests standard in mergers and acquisitions. Firms choosing this option have to meet specific criteria, including the requirements that acquisitions must be financed by common stock rather than by cash and that assets of the acquired company must not be sold for two years after the transaction. Under the pooling standard companies are not required to amortize goodwill generated in such transactions against future earnings. In practice, therefore, merging companies can ignore goodwill for accounting purposes. This allows the financial statements of merged companies to show larger returns on assets and equity than if the companies were required to amortize goodwill.