Pooling of Interest vs Purchase Method in Amalgamation

Understand Accounting for Amalgamation: Pooling and Purchase Methods

Key rules to remember

Goodwill (acquisition method)

Goodwill = Consideration transferred − Fair value of net identifiable assets acquired

Net identifiable assets = fair value of assets − fair value of liabilities. If the result is negative, it is a bargain purchase, not goodwill.

Consideration (shares issued)

Consideration = Number of shares × fair value per share + cash/other assets paid

Under the acquisition method, share capital is credited at face value and the excess is credited to securities premium.

Bargain purchase

Gain = Fair value of net identifiable assets − Consideration

Under Ind AS 103 it is recognised in OCI and accumulated in equity as capital reserve. If there is no clear evidence of a bargain purchase, it goes directly to capital reserve in equity. Check the question's wording.

Capital reserve (pooling)

Difference = (Share capital issued + additional consideration) − Share capital of transferor

Transferred to capital reserve and shown separately from other capital reserves (Appendix C, para 12). If consideration is lower than transferor's share capital, the difference is a credit to capital reserve.

Reserves under pooling

Transferor's reserves are carried over in the same form

General Reserve stays General Reserve, Capital Reserve stays Capital Reserve, Revaluation Reserve stays Revaluation Reserve.

How to solve Accounting for Amalgamation: Pooling and Purchase Methods questions

1. 1Decide the method. Common control means pooling of interests. An unrelated acquirer means the acquisition (purchase) method.
2. 2Compute the purchase consideration: shares at the stated value plus cash and other assets paid.
3. 3List the transferor's assets and liabilities. Use carrying amounts for pooling and fair values for the acquisition method.
4. 4For the acquisition method, find net identifiable assets at fair value and compute goodwill or bargain gain.
5. 5For pooling, compute the difference between consideration and the transferor's share capital and take it to capital reserve. Carry the transferor's reserves over in the same form.
6. 6Pass the main journal entry, then entries for cash paid, expenses or unrecorded items if given.
7. 7Check that debits equal credits, then prepare the transferee's post-merger balances if asked.

Quickest way: Two-line check for the right entry

Common mistakes in Accounting for Amalgamation: Pooling and Purchase Methods

• Revaluing assets to fair value under pooling.

  Students apply acquisition-method habits to every merger.

  Fix: Under pooling, use carrying amounts. Only adjust for aligning accounting policies.

• Showing goodwill under pooling.

  They compute consideration minus net assets as they would in a purchase.

  Fix: Under pooling the difference goes to capital reserve, measured against the transferor's share capital.

• Eliminating the transferor's reserves under pooling.

  They treat the reserves as pre-acquisition profits.

  Fix: Preserve the identity of reserves. General Reserve stays General Reserve, and so on (Appendix C, para 12).

• Carrying the transferor's reserves into the books under the acquisition method.

  They mix the two methods.

  Fix: Under the acquisition method only the net identifiable assets come in. Reserves are not carried over, except the capital reserve arising from a bargain purchase.

• Crediting the full issue value to share capital.

  They ignore that shares are issued at a premium.

  Fix: Credit share capital at face value and the excess of fair value over face value to securities premium.

• Amortising goodwill over a number of years.

  They remember the old AS 14 treatment.

  Fix: Under Ind AS 103, goodwill is not amortised. It is tested for impairment.

Worked examples