Pooling of Interest Method

It is an accounting method, used in mergers and acquisitions, where the balance sheet items of the two companies are simply added together. In this method, transactions are considered as exchange of equity securities. Here, assets and liabilities of the two firms are combined according to their book value on the acquisition date.

Features
1. Recording of assets and liabilities 2. Recording of reserves 3. Recording of balance of profit and loss account 4. Difference between the purchase consideration and the amount of share capital of the transferor company 5. Uniform set of accounting policies

Advantages
1. Pooling of interests accounting is often preferred if the focus subsequent to the transactions is on the income statement. Income statements for periods subsequent to a pooling of interests are not burdened with additional depreciation, goodwill amortization, and other charges attributable to a purchase price in excess of book value.

2. There are no uncertainties or issues regarding purchase price determination 3. Prior years financial statements are restated to reflect the business combination; thus, financial statement year to year comparability is not lost.

Disadvantages
Assets of the acquired company are not written up to a fair value, return on assets may not be comparable with other companies in the same industry. Combining company may not have been audited and performance of the audit work necessary to restate the financial statements may not be possible since it is costly.

Purchase Method
The asset and liabilities of the merged company are presented at their market values as on the date of acquisition, in order to ensure that the resulting values of the accounting process are able to reflect the market values. This refers to the value, which was recorded before the final settlement of the acquisition deal at the time of bargaining.

In this process, the total liabilities of the joint company equal the sum of individuals liabilities of the two separate firms. The purchase price then determines the amount by which the acquiring firms equity is going to increase.

Features
1. Recording of assets and liabilities 2. Recording of statutory reserves 3. Recording of reserves other than statutory reserves 4. Balance of profit and loss account 5. Difference between the purchase consideration and the net assets of the transferor company

Advantages of purchase methods

1. Purchase accounting is often preferred if the acquirers focus after the transaction is on the balance sheet 2. Assets and liabilities are recognized at their fair values instead of at the acquired companys historical costs. Thus, the post combination balance sheet appears healthier under purchase accounting than under pooling accounting

Disadvantages
1. Accounting income is exposed to the write off of additional depreciation, goodwill amortization and other charges that may adversely affect earnings trends. 2. Uncertainties regarding purchase price determination and valuation exist. 3. Prior years financial statements are not restated and, therefore are not comparable.