Distinguish between pooling of interest and purchase method

Banking & FinanceFinance ManagementGrowth & Empowerment

According to accounting standards 14, amalgamation is done according to the nature of merger and nature of purchase. Amalgamation is the process of unification between two or more companies involved in similar business to form a new company.

If the amalgamation nature of merger, method of accounting is used in pooling of interest method and if amalgamation nature of purchase then purchase method of accounting is used.

Pooling of interest method

In this acquired form the capital account is removed and this removed account is replaced by new stock of the acquiring company. In this method deal is nothing but exchange of equity securities.

Purchase method

In this, on the date of acquisition assets are depicted in books of merged firms at fair market value and liabilities at agreed values. In this transferee company records amalgamation either existing carrying amount or at purchase considerations.

Differences

The major differences between pooling of interest and purchase method are as follows −

Pooling of interest method
Purchase method
Assets and liabilities are combined and recorded at their book value.
Assets and liabilities are combined and recorded at their fair value.
Applicable to merger.
Applicable to acquisitions.
Uses book value.
Uses market fair value.
Accounts are aggregated.
Accounts are taken over.
Reserves are untouched.
Reserves are touched.
Differences of purchase and share capital are adjusted to reserves.
Differences of purchase and share capital are adjusted to capital reserves/goodwill.
Book value is lower than purchase value.
Book value is higher than the pooling of interest method.
Higher earnings.
Low earnings when compared to the pooling of interest method.
Accurate sales.
Less accurate sales.
Higher earnings per share.
Low earnings per share, when compared to the pooling of interest method.
Both Return On Asset and Return On Equity are high.
Both Return On Asset and Return On Equity are low.

Conclusion

Both these techniques are important accounting techniques used in merger and acquisitions. They differ in terms of the value of the combined balance sheet of the company on assets of the transferor company.

raja
Published on 13-Jul-2021 13:30:24
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