8 The use of the pooling of interests method is confined to circumstances which meet the criteria referred to in
paragraph 3(e) for an amalgamation in the nature of merger.
9 The object of the purchase method is to account for the amalgamation by applying the same principles as are applied
in the normal purchase of assets. This method is used in accounting for amalgamations in the nature of purchase.
The Pooling of Interests Method
10 Under the pooling of interests method, the assets, liabilities and reserves of the transferor company are recorded
by the transferee company at their existing carrying amounts (after making the adjustments required in paragraph
11 If, at the time of the amalgamation, the transferor and the transferee companies have conflicting accounting
policies, a uniform set of accounting policies is adopted following the amalgamation. The effects on the financial
statements of any changes in accounting policies are reported in accordance with Accounting Standard (AS) 5, Net Profit or Loss for the Period,
Prior Period Items and Changes in Accounting Policies .
12 Under the purchase method, the transferee company 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 of the transferor company on the basis of their fair values at the date of amalgamation. The
identifiable assets and liabilities may include assets and liabilities not recorded in the financial statements of
13 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. For example, the transferee company may have a
specialised use for an asset, which is not available to other potential buyers. The transferee company may intend to
effect changes in the activities of the transferor company which necessitate the creation of specific provisions for
the expected costs, e.g. planned employee termination and plant relocation costs.
14 The consideration for the amalgamation may consist of securities, cash or other assets. In determining the value
of the consideration, an assessment is made of the fair value of its elements. A variety of techniques is applied in
arriving at fair value. For example, when the consideration includes securities, the value fixed by the statutory
authorities may be taken to be the fair value. In case of other assets, the fair value may be determined by
reference to the market value of the assets given up. Where the market value of the assets given up cannot be
reliably assessed, such assets may be valued at their respective net book values.
15 Many amalgamations recognise that adjustments may have to be made to the consideration in the light of one or more
future events. When the additional payment is probable and can reasonably be estimated at the date of amalgamation,
it is included in the calculation of the consideration. In all other cases, the adjustment is recognised as soon as
the amount is determinable [see Accounting
Standard (AS) 4, Contingencies and Events Occurring After the Balance Sheet Date ].
Treatment of Reserves on Amalgamation
16 If the amalgamation is an ‘amalgamation in the nature of merger’, the identity of the reserves is preserved and
they appear in the financial statements of the transferee company in the same form in which they appeared in the
financial statements of the transferor company. Thus, for example, the General Reserve of the transferor company
becomes the General Reserve of the transferee company, the Capital Reserve of the transferor company becomes the
Capital Reserve of the transferee company and the Revaluation Reserve of the transferor company becomes the
Revaluation Reserve of the transferee company. As a result of preserving the identity, reserves which are available
for distribution as dividend before the amalgamation would also be available for distribution as dividend after the
amalgamation. The difference between the amount recorded as share capital issued (plus any additional consideration
in the form of cash or other assets) and the amount of share capital of the transferor company is adjusted in
reserves in the financial statements of the transferee company.
17 If the amalgamation is an ‘amalgamation in the nature of purchase’, the identity of the reserves, other than the
statutory reserves dealt with in paragraph 18, is not preserved. The amount of the consideration is deducted from
the value of the net assets of the transferor company acquired by the transferee company. If the result of the
computation is negative, the difference is debited to goodwill arising on amalgamation and dealt with in the manner
stated in paragraphs 19-20. If the result of the computation is positive, the difference is credited to Capital
18 Certain reserves may have been created by the transferor company pursuant to the requirements of, or to avail of
the benefits under, the Income- tax Act, 1961; for example, Development Allowance Reserve, or Investment Allowance
Reserve. The Act requires that the identity of the reserves should be preserved for a specified period. Likewise,
certain other reserves may have been created in the financial statements of the transferor company in terms of the
requirements of other statutes. Though, normally, in an amalgamation in the nature of purchase, the identity of
reserves is not preserved, an exception is made in respect of reserves of the aforesaid nature (referred to
hereinafter as ‘statutory reserves’) and such reserves retain their identity in the financial statements of the
transferee company in the same form in which they appeared in the financial statements of the transferor company, so
long as their identity is required to be maintained to comply with the relevant statute. This exception is made only
in those amalgamations where the requirements of the relevant statute for recording the statutory reserves in the
books of the transferee company are complied with. In such cases the statutory reserves are recorded in the
financial statements of the transferee company by a corresponding debit to a suitable account head (e.g.,
‘Amalgamation Adjustment Reserve’) which is presented as a separate line item. When the
identity of the statutory reserves is no longer required to be maintained, both the reserves and the aforesaid
Treatment of Goodwill Arising on Amalgamation
19 Goodwill arising on amalgamation represents a payment made in anticipation of future income and it is appropriate
to treat it as an asset to be amortised to income on a systematic basis over its useful life. Due to the nature of
goodwill, it is frequently difficult to estimate its useful life with reasonable certainty. Such estimation is,
therefore, made on a prudent basis. Accordingly, it is considered appropriate to amortise goodwill over a period not
exceeding five years unless a somewhat longer period can be justified.
20 Factors which may be considered in estimating the useful life of goodwill arising on amalgamation include:
