Accounting for Amalgamation

15/07/2021 0 By indiafreenotes

Methods of Accounting for Amalgamations

  1. There are two main methods of accounting for amalgamations:
  • The pooling of interest method
  • The purchase method

The use of the pooling of interest method is confined to circumstances which meet the criteria referred to in paragraph 3(e) for an amalgamation in the nature of merger.

The object of the purchase method is to account for the amalgamation by applying the same principles as are applied in the normal purchase of assets. This method is used in accounting for amalgamations in the nature of purchase.

The Pooling of Interests Method

Under the pooling of interest method, the assets, liabilities and reserves of the transferor company are recorded by the transferee company at their existing carrying amounts (after making the adjustments required.

If, at the time of the amalgamation, the transferor and the transferee companies have conflicting accounting policies, a uniform set of accounting policies is adopted following the amalgamation. The effects on the financial statements of any changes in accounting policies are reported in accordance with Accounting Standard (AS)5, Net Profit or Loss for the Period, Prior Period Items, and Changes in Accounting Policies.

The Purchase Method

Under the purchase method, the transferee company accounts for the amalgamation either by incorporating the assets and liabilities at their existing carrying amounts or by allocating the consideration to individual identifiable assets and liabilities of the transferor company on the basis of their fair values at the date of amalgamation. The identifiable assets and liabilities may include assets and liabilities not recorded in the financial statements of the transferor company.

Where assets and liabilities are restated on the basis of their fair values, the determination of fair values may be influenced by the intentions of the transferee company.

For example, the transferee company may have a specialised use for an asset, which is not available to other potential buyers. The transferee company may intend to effect changes in the activities of the transferor company which necessitate the creation of specific provisions for the expected costs, e.g. planned employee termination and plant relocation costs.

(a) The foreseeable life of the business or industry.

(b) The effects of product obsolescence, changes in demand and other economic factors.

(c) The service life expectancies of key individuals or groups of employees.

(d) Expected actions by competitors or potential competitors.

(e) Legal, regulatory or contractual provisions affecting the useful life.