Difference Between Pooling of Interest Method and Purchase Method

Amalgamation implies a process of unification of two or more companies, which are involved in similar business to form a new company. As per Accounting Standard-14, Amalgamation can take place in two ways, i.e. in the nature of merger and in the nature of the purchase. When amalgamation is in the nature of merger the method of accounting used is the pooling of interest method, whereas is the amalgamation is in the nature of the purchase, purchase method of accounting is used.

In pooling of interest method, the assets and liabilities are recorded at their carrying amounts in the books of the transferee company, whereas in purchase method, the assets and liabilities of the acquired company are recorded in the books of acquiring company at their fair market value, as on the date of acquisition.

The article excerpt attempts to show light on the differences between pooling of interest method and purchase method, check it out.

Content: Pooling of Interest Method Vs Purchase Method

1. Comparison Chart
2. Definition
3. Key Differences
4. Conclusion

Comparison Chart

Basis for Comparison	Pooling of Interest Method	Purchase Method
Meaning	Pooling of Interest Method of accounting is one in which the assets, liabilities and reserves are combined and shown at their historical values, as of the date of amalgamation.	Purchase Method, is an accounting method, wherein the assets and liabilities of the transferor company are shown at their market value in the books of the transferee company, as of the date of amalgamation.
Applicability	Merger	Acquisition
Assets and liabilities	Appear at book values.	Appear at fair market values.
Recording	All the assets and liabilities of the companies undergoing merger are aggregated.	Only those assets and liabilities are recorded in the books of transferee company, which are taken over by it.
Reserves	The identity of transferor company's reserves is kept intact.	The identity of the transferor company'es reserves except statutory reserves is not kept intact.
Purchase Consideration	Difference in the amount of puchase consideration and share capital is adjusted with reserves.	Surplus of deficit of purchase considertaion over the net asset acuiqred, should be credited or debited, as capital reserves or goodwill.

Definition of Pooling of Interest Method

The pooling of interest method is based on the assumption that the deal is nothing but an exchange of equity securities. Hence the capital account of the firm acquired is removed and replaced with the new stock by the acquiring company. The balance sheet of the two firms is united, in which the assets and liabilities are shown at their book values, as on the date of acquisition.

In the end, the aggregate assets of the united firm are equal to the aggregate of the assets of the individual firm. Neither goodwill is general, nor there is a charge against the incomes.

The transferor company’s assets, liabilities, and reserves are entered in the books of accounts of the transferee company, at their existing carrying amounts, after giving effect to relevant adjustments.

Further, the reserves shown on the balance sheet of the transferor company is taken to the transferee company’s balance sheet. The dissimilarity in the capital, as a result of exchange ratio, is adjusted in the reserves.

Definition of Purchase Method

In purchase method, the assets are depicted in the books of the merged firm, at their fair market value and liabilities at agreed values, as on the date of acquisition. It is based on the premise that the final values should represent, the market values decided during the negotiation. The aggregate liabilities of the united firm is equal to the sum of the liabilities of the individual firms. The equity capital of the transferee company is increased by the amount of the purchase consideration.

It is the method of accounting in which the transferee company records amalgamation, either by keeping track of assets and liabilities at their existing carrying amount or by assigning the purchase consideration, to individual assets and liabilities of the transferor company, that are recognizable, at their fair market value, on the date amalgamation becomes effective.

The reserves of the transferor company, excluding statutory reserves, should not become part of the financial statement of the transferee company. Statutory reserves imply the reserves that are created for fulfilling the legal requirement.

The discrepancy amidst the purchase consideration and the net worth is termed as goodwill, which requires amortization, within five years. Further, if the consideration is lower than the net book value of assets over liabilities, the difference is indicated as capital reserve.

Conclusion

So, pooling of interest and purchase method are the two important accounting techniques used in the mergers and acquisitions of the companies. They mainly differ, in terms of the value that the combined balance sheet of the company places on the assets of the transferor company.