Methods of Accounting for Amalgamation
1. Pooling of Interests Method: The amalgamation is handled as a merger of equals under the Pooling of Interests Method, and the merged firms’ financial statements are presented as if they had always been one. Some of this method’s primary characteristics include:
- No Recognition of Goodwill: This approach does not acknowledge goodwill. The joining firms register their assets and liabilities at their carrying amounts and merge their shareholders’ equity accounts.
- Pooling of Liabilities and Assets: The merged firms’ liabilities and assets are valued at their historical carrying amounts. This entails merging the revenue and cost elements from the financial statements as well as the balance sheet items.
- No Adjustment to Share Capital: There is no adjustment made to the merged firms’ share capital or reserves. By the agreed exchange ratio, the shareholders of the merging firms get shares in the newly created company.
2. Purchase Method: Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS) are compliant with the more popular Purchase Method. Using this approach, the acquiring firm views the merger as a purchase of the acquired business’s assets and liabilities. Among the salient characteristics are:
- Recognition of Goodwill: The difference between the acquisition amount and the fair market value of the acquired identified net assets is known as goodwill. Future financial gains from synergies and other intangible assets that are not independently identifiable are represented by goodwill.
- Fair Value Measurement: At the time of the merger, the acquired company’s assets and liabilities are recorded at their fair values. Revaluing certain assets and liabilities to reflect their current market values may be necessary to achieve this.
- Adjustment to Share Capital: The acquiring firm’s consideration is distributed among the identified assets and liabilities of the acquired business. Any excess payment is deducted from shareholders’ equity and classified as goodwill.