The Purchase Method: Principles

In one line

Record what was bought at the values the scheme sets, leave the transferor's reserves behind, and put the difference between the price and the net assets to goodwill or capital reserve.

When it applies

Paragraph 32: when an amalgamation is considered to be an amalgamation in the nature of purchase, it should be accounted for under the purchase method described in paragraphs 36 to 39.

Again there is no choice. Failing any one merger condition puts you here.

The idea behind it

Paragraph 12 explains it. Under the purchase method the transferee accounts for the amalgamation either by incorporating the assets and liabilities at their existing carrying amounts, or by allocating the consideration to individual identifiable assets and liabilities on the basis of their fair values at the date of amalgamation.

Paragraph 13 adds that where assets and liabilities are restated on the basis of their fair values, the determination of fair values may be influenced by the intentions of the transferee company: an asset the transferee means to dispose of will be valued differently from one it means to use.

The governing thought is that a purchase has taken place. A price was paid, and the accounting should show what was bought and what was paid for it.

The three rules

Paragraph 36, first limb: at what values.

The assets and liabilities of the transferor are incorporated at their existing carrying amounts, or alternatively the consideration is allocated to individual identifiable assets and liabilities on the basis of their fair values at the date of amalgamation.

Paragraph 36, second limb: the reserves do not come.

The reserves of the transferor, whether capital or revenue or arising on revaluation, other than the statutory reserves, should not be included in the financial statements of the transferee, except as stated in paragraph 39.

This is the single largest difference from pooling. Beta's General Reserve of Rs 60,000 and its Profit and Loss balance of Rs 40,000 simply do not arrive. They were bought out; the price paid for them is in the consideration.

The exception, statutory reserves, is dealt with in [Treatment of Reserves, and the Amalgamation Adjustment Account].

Paragraph 37: the difference.

Any excess of the amount of the consideration over the value of the net assets of the transferor acquired by the transferee should be recognised in the transferee's financial statements as goodwill arising on amalgamation. If the consideration is lower than the value of the net assets acquired, the difference should be treated as Capital Reserve.

The difference, computed