Methods of Accounting for Amalgamation of Companies

There are two methods:

1. Pooling of interest method

2. Purchase method

1. Pooling of Interests method (Merger method):

The assets, liabilities and reserves of Transferor Company are recorded by the transferee company at existing carrying amounts after adjusting for uniform accounting principles.

The reserves are preserved in case of this method in the same form as it appeared in financial statements of transferor company. The difference between share capital issued and amount of share capital of transferor company is adjusted in reserves.

2. Purchase Method:

Transferee company Incorporates assets and liabilities of transferor company on basis of fair values. 

The identity of reserves other than statutory reserves like investment allowance reserve, development allowance reserve is not preserved. Difference may be termed as goodwill/capital reserve.

The amount of consideration is deducted from the value of net assets of transferor company if result is negative it is goodwill otherwise capital reserve.

The statutory reserve is recorded by giving a debit to amalgamation adjustment account under misc. expenditure on assets side.

Difference between Pooling of interest and purchase method of recording transactions relating to amalgamation: 

Basis	Pooling of Interest Method	Purchase Method
a)   Applicability	The pooling of interest method is applied in case of an amalgamation in the nature of merger.	Purchase method is applied in the case of an amalgamation in the nature of purchase.
b)   Recording	In the pooling of interest method all the reserves of the transferor Co. are also recorded by the transferee Co. in its books of account.	In the purchase method the transferee Co. records in its books of accounts only the assets and liabilities taken over the reserves, except the statutory reserves of the transferor company are not aggregated with those of the transferee Co.
c)    Adjustment of the differences	Under the pooling of interest method, the difference between the consideration paid and the share capital of the transferor company is adjusted in the general reserve or other reserves of the transferee company.	Under the purchase method, the difference between the consideration and net assets taken over is treated by the transferee company as goodwill or capital reserve.
d)   Statutory reserves	In this method, the statutory reserves are recorded by the transferee co. like all other reserves without opening Amalgamation and Adjustment A/c.	In the purchase method, while incorporating the statutory reserves, the transferee Co. has to open amalgamation adjustment account debiting it with the amt. of the statutory reserves being incorporated.