The Pooling of Interests Method: Principles

In one line

Under pooling the two companies' figures are added together at book value, the reserves come across intact, and any difference on the capital is adjusted inside reserves.

When it applies

Paragraph 31: when an amalgamation is considered to be an amalgamation in the nature of merger, it should be accounted for under the pooling of interests method described in paragraphs 33 to 35.

There is no choice. The classification decides the method.

The idea behind it

Paragraph 3(i) defined pooling as a method whose object is to account for the amalgamation as if the separate businesses of the amalgamating companies were intended to be continued, so that only minimal changes are made in aggregating the individual financial statements.

Paragraph 7 puts the same thought commercially: where there is a genuine pooling of assets, liabilities, shareholders' interests and businesses, the resulting figures should more or less represent the sum of the amalgamating companies' figures.

Nothing has been bought. Two groups of owners have combined their businesses and continue to own them. So nothing is restated, and nothing is recognised that was not there before.

The three rules

Paragraph 33: record at existing carrying amounts, and in the same form.

In preparing the transferee's financial statements, the assets, liabilities and reserves of the transferor are recorded at their existing carrying amounts and in the same form as at the date of the amalgamation.

And: the balance of the Profit and Loss Account of the transferor should be aggregated with the corresponding balance of the transferee, or transferred to the General Reserve, if any.

Note what that permits. The transferor's reserves come across as reserves, keeping their identity. Its General Reserve joins the transferee's General Reserve. Its Profit and Loss balance is added to the transferee's, or put to General Reserve.

Paragraph 34: align accounting policies.

If the two companies have conflicting accounting policies, a uniform set must be adopted after the amalgamation, and the effect of any change is reported in accordance with AS 5.

This is the one adjustment condition (v) of paragraph 29 permits, and paragraph 34 is where the standard tells you to make it.

Paragraph 35: the difference goes into reserves.

The difference between the amount recorded as share capital issued, plus any additional consideration in cash or other assets, and the amount of share capital of the transferor company, should be adjusted in reserves.

Read that carefully, because it is not the difference students expect.

It is not consideration less net assets. It is share capital issued less the transferor's share capital. Under pooling the net assets come across at book value, so the only thing that can be out of step is the capital, and the fix is made in reserves.