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Difference between the grouping of the method of interest and the method of purchase

The amalgamation involves a process of unification of two or more companies, which are involved in similar activities to form a new company. According to accounting standard 14, amalgamation can occur in two ways, namely in the nature of the merger and in the nature of the purchase. When the merger into the nature of the merger, the accounting method used the method of the interest pooling, while the merger into the nature of the purchase, the method of purchase of accounting.

In the interest pooling method, the assets and liabilities are recorded at book values ??in the books of the assignee company, while in the purchase method the assets and liabilities of the acquired company are recorded in the books of the acquiring company at their fair market value. , as on the acquisition date.

The extracted article attempts to shed light on the differences between the interest grouping method and the purchase method, verify it.

Comparative chart

Basis for comparisonPooling of Interest MethodPurchase method
Sense Pooling of Interest The accounting method is the one in which the assets, liabilities and reserves are combined and shown at their historical values ??on the date of the merger. Purchase method, an accounting method, in which the assets and liabilities of the assignor company are indicated at their market value in the books of the assignee company, on the date of the merger.
applicability merger Acquisition
Assets and liabilities Appears to the values ??of the book. Appears at fair market values.
registration All the assets and liabilities of the merged companies are aggregated. Only the assets and liabilities are recorded in the books of the transferee company, which are assumed.
stocks The identity of the transferor's reserves remained intact. The identity of the reserves of the transferor company, with the exception of the statutory reserves, is not kept intact.
Purchase consideration The difference in the amount of the puchase consideration and the share capital are adjusted with reserves. The excess of the valuation deficit of the purchase over the acuiqred net worth should be credited or debited, as capital reserves or goodwill.

Definition of the method of grouping interests

The interest pooling method is based on the assumption that the agreement is nothing more than an exchange of shares. Then the capital account of the acquired company is removed and replaced with the new stock by the acquiring company. The financial statements of the two merged companies, in which the assets and liabilities are exposed to book values, as at the acquisition date.

In the end, the aggregate assets of the merged company are equal to the aggregate of the activities of the individual enterprise. N general goodwill, n there is a charge against income.

The transferor's assets, liabilities and reserves are recorded in the assignee's accounting books, at their respective existing book values, after giving effect to the relevant adjustments.

In addition, the reserves indicated in the balance sheet of the assignor company are taken in the balance sheet of the assignee company. The dissimilarity in capital, as a result of the exchange ratio, adjusted in reserves.

Definition of the purchase method

In the purchase method, the assets are represented in the books of the incorporated company, at their fair market value and liabilities at the agreed values, on the acquisition date. It is based on the premise that the final values ??should represent the market values ??decided during the negotiation. The combined liabilities of the combined enterprise are equal to the sum of the liabilities of the individual enterprises. The share capital of the transferee company increased by the amount of the purchase price.

the accounting method in which the assignee company records the merger, keeping track of the assets and liabilities at their existing book value or assigning the purchase price to the individual assets and liabilities of the transferor company, which are recognizable, at their fair market value , on the date on which the merger becomes effective.

The reserves of the assignor company, with the exception of the statutory reserves, must not become part of the financial report of the assignee company. Statutory reserves imply reserves created to meet the legal requirement.

The discrepancy between the purchase price and equity defined as goodwill, which requires amortization, within five years. Furthermore, if the consideration is lower than the net book value of the assets compared to the liabilities, the difference indicated as capital reserve.

Key differences between the grouping of interests and the method of purchase

The differences between the combination of interests and the method of purchase can be clearly expressed for the following reasons:

  1. When the assets, liabilities and reserves are combined and shown at their historical values, starting from the date of the merger, the method called interest pooling method. Conversely, when the assets and liabilities of the transferring entity are indicated at their market value in the balance sheet of the transferee entity, at the date of the merger, it is called the purchase method.
  2. The interest pooling method is applied when the merger in the nature of the merger. However, by amalgamation into the nature of the purchase, the purchase method is applied.
  3. In the interest pooling method, the assets and liabilities are shown at book values, while, when the accounting accounting method is used, the assets and liabilities are shown at their fair market value.
  4. In the interest pooling method, the recording of the assets and liabilities of the companies participating in the aggregate merger. On the other hand, when it comes to the recording of assets and liabilities, only the assets and liabilities are indicated in the financial statements of the incorporating company, which is recognized.
  5. In the pooling of the interest method, the identity of the assignor's reserves remains the same. On the other hand, in the purchase method, the identity of the reserves of the transferor company, with the exception of the statutory reserves, does not remain the same.
  6. In the interest pooling method, the difference between the purchase price and the share capital adjusted with reserves, i.e. if the purchase price is higher than the share capital, then the reserves are charged and credited when the purchase price less than the share capital. On the contrary, in the purchase method, when the purchase price exceeds the shareholders 'equity, the goodwill is charged and if the purchase price less than the shareholders' equity, the balance is credited as capital reserves.

Conclusion

Therefore, the combination of interests and purchase method are the two important accounting techniques used in the mergers and acquisitions of the companies. They differ mainly in terms of value that the joint financial statements of the company place on the assets of the transferor company.