Advanced Accounting · Amalgamation of Companies

Pooling of Interests and Purchase Method of Accounting (AS 14)

Updated 5 October 2026 · Fact-checked

AS 14 gives two methods. Pooling of interests applies to a merger: assets, liabilities and reserves stay at book value, and the difference between the transferor's share capital and the consideration paid is adjusted in reserves. The purchase method applies to a purchase: the difference between consideration and net assets is goodwill or capital reserve.

Understand Methods of Accounting: Pooling of Interests and Purchase Method

When one company absorbs another, the transferee company must record what it took over. AS 14 says how, and the method depends on the type of amalgamation. Check the type first.

An amalgamation in the nature of merger satisfies all five conditions of AS 14: all assets and liabilities of the transferor become those of the transferee; shareholders holding at least 90% of the transferor's equity shares (excluding shares already held by the transferee or its nominees) become equity shareholders of the transferee; consideration for those shareholders is discharged wholly by issue of equity shares in the transferee (cash is allowed only for fractional shares); the business of the transferor is intended to be carried on after the amalgamation; and no adjustment is intended to be made to the book values of the assets and liabilities of the transferor when they are incorporated in the transferee's financial statements, except to ensure uniformity of accounting policies. If even one condition fails, it is an amalgamation in the nature of purchase.

Under the pooling of interests method, the two companies are treated as if they always belonged together. Assets, liabilities and reserves of the transferor are recorded at existing carrying amounts. Reserves of the transferor stay as reserves of the same kind, such as General Reserve, Securities Premium or Statutory Reserves. The only comparison needed is between the transferor's share capital and the face value of shares issued by the transferee, plus any consideration paid in cash or other assets. Under AS 14, the difference between the two is adjusted in reserves. AS 14 itself does not give this difference a special name. If that total is less than the transferor's share capital, the difference is a surplus and it is added to reserves. Some problems label it Capital Reserve or Amalgamation Reserve. That label is a convention used in the problem, so follow the question. If the total is more, the difference is a deficit and is deducted from reserves. The question usually says which reserve to use. If it does not, deduct the deficit from General Reserve.

Under the purchase method, the transferee is buying a business. AS 14 allows two approaches. Under the first, assets and liabilities are recorded at their existing book values. Then the excess of consideration over net assets taken over is goodwill, and the excess of net assets over consideration is capital reserve. Under the alternative, the consideration is allocated to the individual identifiable assets and liabilities on the basis of their fair values. Goodwill or capital reserve is then the residual after that allocation: consideration minus the fair value of the net identifiable assets taken over. Reserves of the transferor, except statutory reserves, are not carried forward under either approach, because the transferee paid for the net assets.

Statutory reserves, such as Development Allowance Reserve or Investment Allowance Reserve, are an exception under the purchase method. If the law requires them to be maintained for a period, the transferee credits the same statutory reserve and debits an equal amount to an Amalgamation Adjustment Account (shown under Other Current/Non-current Assets). When the statutory reserve is no longer required, the adjustment account is cleared.

Key rules to remember

Net assets taken over: Net assets = Assets taken over − Liabilities taken over; Use book value in pooling. In purchase, use agreed or fair values if the question gives them.
Pooling of interests: adjustment: Difference = Share capital of transferor − (Face value of shares issued by transferee + Consideration paid in cash or other assets); AS 14 only requires this difference to be adjusted in reserves. If positive, it is a surplus added to reserves. Some problems label it Capital Reserve or Amalgamation Reserve; that is a convention, so use the label the question gives. If negative, it is a deficit deducted from reserves (use the reserve the question names, otherwise General Reserve). In pooling, you do not compare the purchase consideration with net assets to find goodwill.
Purchase method: goodwill or capital reserve: Purchase consideration − Net assets taken over = Goodwill (if positive) or Capital Reserve (if negative); Net assets = assets − external liabilities. Reserves and share capital are not deducted or added. Non-statutory reserves are simply not carried forward.
Reserves in pooling: Transferor's reserves are recorded in the transferee's books in the same form, at the same amounts; Securities Premium, General Reserve and P&L balance are carried forward. Adjust against the difference only as per the formula above.
Reserves in purchase: Non-statutory reserves of the transferor are not carried forward; statutory reserves are carried forward with a credit to the same Statutory Reserve and a debit to Amalgamation Adjustment Account; Amalgamation Adjustment Account is reversed when the statutory reserve is no longer required. This is a separate carry-forward entry and does not change the goodwill or capital reserve calculation.
Merger test: 90% of transferor's equity shareholders (excluding shares held by transferee) take equity shares in transferee, plus four other conditions; All five conditions must hold for the nature of merger.

How to solve Methods of Accounting: Pooling of Interests and Purchase Method questions

Use the same sequence for every question. It stops you mixing the two methods.

1Read the question for the method named. If it says 'nature of merger', use pooling. If it says 'nature of purchase', use purchase. If it names neither, test the five conditions of AS 14.
2List the assets and liabilities taken over. Note whether all are taken over and whether values change.
3Compute net assets taken over. Exclude fictitious assets only if the question says so, and keep items like Profit and Loss debit balance or Preliminary Expenses as given in the question.
4Compute the purchase consideration (shares at issue price plus cash) if the question asks for it or you need it. In pooling, you also need the face value of the shares issued and any cash or other consideration paid.
5Pooling: compare the transferor's share capital with the face value of shares issued by the transferee plus any cash or other consideration. Carry every reserve forward. The difference is adjusted in reserves. If the transferor's share capital is larger, the surplus is added to reserves (use the label the question gives, such as Capital Reserve or Amalgamation Reserve). If it is smaller, the deficit is deducted from reserves (the one the question names, otherwise General Reserve).
6Purchase: compare consideration with net assets. Record Goodwill or Capital Reserve. Do not carry forward non-statutory reserves. Carry forward statutory reserves by crediting the Statutory Reserve and debiting Amalgamation Adjustment Account.
7Pass the journal entries in the transferee's books and show the working note for the balance sheet figures.
8Check that debit and credit sides of the closing entry match, and state the method and treatment in one line at the end.

Quickest way: Two-line method for MCQs and written answers

When to use it: Use it when time is short and the question asks for the amount of goodwill, capital reserve, or a reserve in the transferee's balance sheet.

MCQ: decide merger or purchase first. Pooling gives no goodwill. Goodwill appears only in purchase.
Pooling shortcut: reserves of the transferee plus reserves of the transferor. Then take the transferor's share capital minus (shares issued at face value plus any cash paid). If positive, add it to reserves, using the label the question gives. AS 14 only says the difference is adjusted in reserves. If negative, deduct it from reserves.
Purchase shortcut: the transferee's own reserves stay as they are. Add the transferor's statutory reserves to reserves. Show any capital reserve arising on the purchase as its own line, not inside other reserves. The equal debit to Amalgamation Adjustment Account is shown as an asset, so do not net the two off in reserves. Clear that account when the statutory reserve is no longer required. Goodwill, if any, is an asset and does not touch reserves.
Eliminate options that carry forward all reserves under purchase, or that show goodwill under pooling.
Written answer: start with the nature of the amalgamation and cite the AS 14 condition. Then show a working note for net assets, consideration, and goodwill or capital reserve. Then give the journal entries. Marks are given for each step, so show them even if the final figure is wrong.

Common mistakes in Methods of Accounting: Pooling of Interests and Purchase Method

Carrying forward all transferor reserves under the purchase method.
Students remember that pooling carries reserves and apply the same rule everywhere.
Fix: Under purchase, only statutory reserves are carried forward, with a debit to Amalgamation Adjustment Account. Other reserves are not recorded.
Calculating goodwill under pooling of interests.
Students compare consideration with net assets as in purchase.
Fix: In pooling, compare the transferor's share capital with the face value of shares issued plus any cash or other consideration. The result is a surplus added to reserves or a deficit adjusted against reserves, never goodwill.
Treating a deal as merger just because shares are issued.
Students skip the other conditions, such as 90% of equity shareholders and no adjustment to book values (except for uniform accounting policies).
Fix: Check all five AS 14 conditions. Failing any one makes it a purchase.
Including the transferor's non-statutory reserves in net assets under purchase.
Reserves are on the liabilities side of the balance sheet, so students treat them as liabilities.
Fix: Net assets are assets less external liabilities only. Reserves and share capital are not liabilities to outsiders.
Forgetting to clear the Amalgamation Adjustment Account.
Students treat the account as permanent.
Fix: Show it as an asset in the transferee's balance sheet. Clear it when the statutory reserve is no longer required. Show the statutory reserve in reserves and any capital reserve from the purchase as its own line.
Using the issue price of shares in the pooling comparison.
Students mix up consideration (issue price) with share capital (face value).
Fix: In pooling, use the face value of shares issued, plus any cash or other assets paid. Do not use the issue price in this comparison.

Worked examples

Example 1

A Ltd. is amalgamated with B Ltd. in the nature of merger. A Ltd.'s balance sheet shows: equity share capital (50,000 shares of ₹10 each) ₹5,00,000; General Reserve ₹1,00,000; Securities Premium ₹50,000; Sundry creditors ₹60,000; assets ₹7,10,000 (all taken over at book value). All shareholders of A Ltd. receive 9 equity shares of ₹10 each in B Ltd., issued at par, for every 10 shares held in A Ltd. No cash or other consideration is paid. The question directs that any surplus on pooling be added to reserves as Amalgamation Reserve. Show how the reserves appear in B Ltd.'s books.

Show the solution

Method: nature of merger, so pooling of interests. All shareholders of A Ltd. take equity shares and the consideration is wholly in shares, so the 90% and share-consideration conditions are met. The 9-for-10 ratio does not affect the test. Assets and liabilities are recorded at book value.
Net assets of A Ltd. = ₹7,10,000 − ₹60,000 = ₹6,50,000. Check: share capital 5,00,000 + General Reserve 1,00,000 + Securities Premium 50,000 = ₹6,50,000.
Shares issued by B Ltd. = 50,000 × 9 ÷ 10 = 45,000 shares. Share capital issued = 45,000 × ₹10 = ₹4,50,000. No cash or other consideration is paid.
Transferor's share capital ₹5,00,000 − (shares issued ₹4,50,000 + cash ₹0) = ₹50,000. Under AS 14 this difference is adjusted in reserves. It is positive, so it is a surplus added to reserves. As the question directs, it is shown as Amalgamation Reserve.
Reserves carried forward: General Reserve ₹1,00,000 and Securities Premium ₹50,000, in the same form.
Entry in B Ltd.'s books: Assets A/c Dr ₹7,10,000; To Sundry Creditors ₹60,000; To Equity Share Capital ₹4,50,000; To General Reserve ₹1,00,000; To Securities Premium ₹50,000; To Amalgamation Reserve (surplus added to reserves) ₹50,000. Total credits = 60,000 + 4,50,000 + 1,00,000 + 50,000 + 50,000 = ₹7,10,000, which equals the debit.

Answer: B Ltd. issues 45,000 shares (₹4,50,000) and records General Reserve ₹1,00,000, Securities Premium ₹50,000 and a surplus of ₹50,000 added to reserves as Amalgamation Reserve, as the question directs. There is no goodwill under pooling.

Example 2

X Ltd. takes over Y Ltd. in an amalgamation in the nature of purchase. Y Ltd.'s assets (book value ₹9,00,000) and liabilities (₹1,50,000) are taken over at book value. Purchase consideration is ₹6,30,000, paid by issuing 63,000 equity shares of ₹10 each at par. Y Ltd. has a General Reserve of ₹1,00,000 and a Statutory Reserve of ₹80,000 which must be maintained by law. Show the entry in X Ltd.'s books.

Show the solution

Method: nature of purchase, so purchase method.
Net assets taken over = ₹9,00,000 − ₹1,50,000 = ₹7,50,000. Reserves are not deducted, because net assets are assets less external liabilities.
Purchase consideration = ₹6,30,000. Net assets exceed consideration by ₹7,50,000 − ₹6,30,000 = ₹1,20,000, so it is a capital reserve.
General Reserve of ₹1,00,000 is not carried forward. The transferee has paid for net assets.
Statutory Reserve of ₹80,000 is carried forward. X Ltd. credits Statutory Reserve ₹80,000 and debits Amalgamation Adjustment Account ₹80,000. This is a separate reserve-carry-forward entry. It does not change net assets, so it does not affect the ₹1,20,000 capital reserve.
Entry 1: Assets A/c Dr ₹9,00,000; To Liabilities ₹1,50,000; To Liquidator of Y Ltd. (consideration) ₹6,30,000; To Capital Reserve ₹1,20,000. Credits = 1,50,000 + 6,30,000 + 1,20,000 = ₹9,00,000, which equals the debit.
Entry 2 (separate statutory reserve entry): Amalgamation Adjustment A/c Dr ₹80,000; To Statutory Reserve ₹80,000.
Entry 3: Liquidator of Y Ltd. Dr ₹6,30,000; To Equity Share Capital ₹6,30,000.

Answer: Capital Reserve is ₹1,20,000, shown as its own line. Statutory Reserve of ₹80,000 is carried forward through a separate entry with an equal debit to Amalgamation Adjustment Account, which is cleared when the statutory reserve is no longer required. This entry does not affect the capital reserve. The General Reserve of ₹1,00,000 is not carried forward.

Exam tips

Write the nature of the amalgamation in the first line of every answer, with the AS 14 condition that decides it.
Read whether the question asks for book values or fair values of assets. Under purchase, AS 14 allows either approach, but the question usually states which one.
Note the words 'statutory reserve'. They signal the Amalgamation Adjustment Account entry, which is a frequent source of step marks.
In MCQs, test each option quickly: goodwill under pooling is wrong, and carrying all reserves under purchase is wrong.
Show a working note for net assets and consideration. Even if the arithmetic slips, you still earn method marks.

Practice questions from Amalgamation of Companies

Methods of Accounting: Pooling of Interests and Purchase Method in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Methods of Accounting: Pooling of Interests and Purchase Method: frequently asked questions

What is the main difference between pooling of interests and the purchase method?

Pooling treats the amalgamation as a union of ownership, so assets, liabilities and reserves carry over at book value. Purchase treats it as a buy-out, so the difference between consideration and net assets is goodwill or capital reserve, and non-statutory reserves are not carried forward.

How are reserves treated in an amalgamation in the nature of purchase?

Non-statutory reserves of the transferor are not carried forward. Statutory reserves are recorded in the transferee's books in the same form, and a matching debit is made to Amalgamation Adjustment Account. This account is cleared when the statutory reserve is no longer required.

When does goodwill or capital reserve arise?

Under the purchase method, goodwill arises when consideration exceeds net assets taken over, and capital reserve arises when net assets exceed consideration. Under pooling, no goodwill arises. The difference between the transferor's share capital and the shares issued at face value plus any cash paid is adjusted in reserves. A surplus is added to reserves (some problems call it Capital Reserve) and a deficit is deducted from reserves.

How do I know if it is a merger or a purchase?

Check the five conditions in AS 14. They cover taking over all assets and liabilities, 90% of equity shareholders becoming shareholders of the transferee, consideration wholly in equity shares, continuation of the business, and no adjustment to book values except for uniformity of accounting policies. If any condition fails, it is a purchase.