Accounting for Mergers (Purchase Method, Pooling of Interest Method)

Mergers involve the combination of two or more companies into one entity. The accounting treatment of mergers is governed by Accounting Standard (AS) 14 – Accounting for Amalgamations, and in the context of Ind AS (for companies complying with IFRS-based standards), it is dealt with in Ind AS 103 – Business Combinations.

There are two primary methods of accounting for mergers:

1. Purchase Method

2. Pooling of Interest Method

The method used depends on the nature of the amalgamation—whether it is considered a merger (amalgamation in the nature of merger) or a purchase (amalgamation in the nature of purchase).

Pooling of Interest Method:

Nature:

Used when the amalgamation is in the nature of merger—i.e., the combining entities merge on equal footing and continue as if they were always one entity.

Conditions for Use (As per AS-14):

• All assets and liabilities of the transferor company become those of the transferee company.

• Shareholders holding not less than 90% of the face value of equity shares of the transferor become shareholders of the transferee.

• Consideration is discharged wholly by issue of equity shares, except for fractional shares.

• The business of the transferor company continues post-amalgamation.

• No adjustment is made to the book values of the assets and liabilities except for ensuring uniform accounting policies.

Key Features:

• Assets and liabilities are recorded at book values.

• Reserves of the transferor company (including general reserve, P&L account) are also carried forward.

• No goodwill or capital reserve arises unless there is a need to align accounting policies.

• Amalgamation is viewed as a continuation of business.

Accounting Entries:

Example:

Company A amalgamates with Company B. All assets and liabilities of B are recorded at book value in A’s books. No revaluation is done. The reserves of Company B are also merged with A’s reserves.

Purchase Method:

Nature:

Used when the amalgamation is in the nature of purchase—i.e., one company acquires another, and the transferor company ceases to exist.

Conditions for Use:

• The amalgamation does not meet the criteria of a merger.

• The transferee company may or may not continue the business of the transferor.

• The shareholders of the transferor may or may not become shareholders of the transferee.

• Consideration may be in any form (cash, shares, etc.)

Key Features:

• Assets and liabilities are recorded at fair values.

• Only statutory reserves (like capital redemption reserve, revaluation reserve) are carried forward.

• Goodwill or Capital Reserve is recognized depending on the difference between the purchase consideration and net assets acquired.

• Amalgamation is viewed as an acquisition.

Calculation:

Purchase Consideration – Net Assets (Fair Value)
→ If Positive: Goodwill
→ If Negative: Capital Reserve

Accounting Entries:

Example:

Company X acquires Company Y for ₹50 lakhs. Fair value of net assets is ₹45 lakhs. The excess ₹5 lakhs is recorded as Goodwill.

Comparison of Pooling of Interest vs Purchase Method

Transition to Ind AS 103 – Business Combinations

Under Ind AS 103, India aligns more closely with IFRS 3, which recognizes only the Acquisition Method (similar to the Purchase Method under AS-14). The Pooling of Interest method is used only for common control transactions (e.g., amalgamation between group companies).

Key Steps under Ind AS 103:

1. Identify acquirer

2. Determine acquisition date

3. Recognize and measure identifiable assets and liabilities

4. Recognize and measure goodwill or gain from bargain purchase

Goodwill and Capital Reserve:

• Goodwill is recorded when purchase consideration > fair value of net assets.

• Capital Reserve is recorded when purchase consideration < fair value of net assets.

• Goodwill should be tested annually for impairment (especially under Ind AS).

• Capital Reserve is shown under Reserves & Surplus in the balance sheet.

Accounting Treatment Summary Table: