Question

What are some of the key differences between the,  acquisition method, purchase method and pooling of interests method?

Answer 1

A.key differences between acquisition method, purchase method are as follows :-

1. Under the purchase method, the difference between the acquired company's fair value and its purchase price would be accounted for as negative goodwill on the balance sheet and Under the acquisition method, however, the negative goodwill is treated as a gain on the income statement immediately with the acquisition.

2. Fair value is the price a buyer would freely pay for a purchase. Under the purchase method, the acquirer assigns values to acquired assets and liabilities based on the cost of the acquisition. If the acquirer makes the purchase at a bargain price, the buyer must mark down the values of assets and liabilities so the total does not exceed the purchase price. Unfortunately, this often results in balance sheet values that differ from fair value.

3. A contingent asset or liability is one that a company may recognize based on future events. The purchase method requires no acknowledgment of contingencies arising from a merger or acquisition. In contrast, the acquisition method obliges the acquirer to recognize contingencies, whether contractual or otherwise, at fair value. The fair value is the best estimate of the contingency as of the acquisition date. When new information becomes available, the acquirer may raise the value of the contingent liabilities and lower the value of contingent assets.

4. An acquirer may pay more or less than fair value for its acquisition. Under both methods, excess payment creates the intangible asset “goodwill.” If instead the acquirer scores a bargain purchase, the purchase method treats the bargain savings as negative goodwill that creates prorated reductions in asset and liability values. This treatment does not affect the acquirer’s income statement. Under the acquisition method, the acquirer simply recognizes the bargain savings as a gain on its income statement.

5. The two methods differ in their treatment of acquired in-process research and development, or IPRD, projects. Under the purchase method, the acquirer must measure at fair value IPRD that has no alternative future use and to immediately expense this amount. The acquisition method also measures IPRD projects at fair value on the acquisition date, but it treats these amounts as noncurrent assets. If anIPRD project proves to be successful, the acquirer amortizes the asset over its estimated lifetime. If the IPRD project flops, the acquirer writes off the impaired asset and books a loss.

B. Key differences between pooling of interests method and purchase method :-

1. When the assets, liabilities, and reserves are combined and shown at their historical values, as of the date of amalgamation, the method is called pooling of interest method. Conversely, When the assets and liabilities of the transferor entity are shown at their market value in the balance sheet of the transferee entity, as of the date of amalgamation, is called purchase method.

2. Pooling of interest method is applied when amalgamation is in the nature of merger. However, for amalgamation in the nature of the purchase, purchase method is applied.
3. In pooling of interest method, assets and liabilities appear at their book values, whereas, when purchase method of accounting is used, the assets and liabilities are shown at their fair market value.
4. Pooling of interest method, the recording of assets and liabilities of the merging companies is aggregated. On the other hand, when it comes to the recording of assets and liabilities, only those assets and liabilities are shown in the balance sheet of the acquiring company, which are taken over by it.
5. In pooling of interest method, the identity of transferor company’s reserves remains same. As against, in purchase method, the identity of the transferor company’s reserves except statutory reserves does not remain same.
6. In pooling of interest method the difference between purchase consideration and share capital is adjusted with reserves, i.e. if purchase consideration is greater than share capital, then the reserves is debited, and credited when purchase consideration is less than the share capital. On the contrary, in purchase method, when purchase consideration is greater than the net worth, goodwill is debited and if the purchase consideration is less than the net assets, then the balance is credited as capital reserves.

These are all the information required to solve the given question.

I hope, all the above mentioned information and explanations are useful and helpful to you.

Thank you.