Account Acquirement Accounting: Meaning and Its Operations
In the realm of business combinations, two accounting methods stand out: purchase acquisition accounting and pooling of interests. These methods, while sharing some similarities, differ significantly in how they record assets and liabilities and treat goodwill.
Purchase Acquisition Accounting
Also known as the purchase method, this accounting approach records the acquired assets and liabilities at their fair values as of the acquisition date. The acquirer recognizes any difference between the purchase price and the fair value of net assets as goodwill on the balance sheet. This method reflects the economic reality of the transaction, recognizing any premium paid over book value.
Pooling of Interests
The pooling of interests method, historically used and sometimes referred to as amalgamation in the nature of merger, combines the book values of the assets and liabilities of the transferor and transferee without revaluing to fair value. No goodwill is recognized; instead, the historical carrying amounts are carried forward. The equity holders of the transferor company continue in the transferee company, usually requiring at least 90% shareholder continuity. Consideration typically involves only equity shares, and the business is intended to continue without interruption.
Comparison
| Feature | Purchase Acquisition Accounting | Pooling of Interests Method | |--------------------------|-------------------------------------------|-------------------------------------------------| | Asset/Liability Valuation| Recorded at fair value | Carried at book (existing carrying) value | | Goodwill Recognition | Recognized based on purchase price premium| No goodwill recognized | | Shareholder Continuity | Not mandatory | Usually requires 90%+ shareholder continuity | | Consideration | Cash, equity, or other forms can be used | Usually only equity shares | | Business Continuity | May or may not continue seamlessly | Business intended to continue as prior |
The purchase method reflects current market values and is more focused on economic substance, while pooling preserves historical accounting records and is more focused on continuity.
Modern accounting standards, such as Ind AS 103 or IFRS 3, generally require acquisition method accounting, and pooling of interests is now largely obsolete or limited in application. The pooling method remains relevant primarily under older accounting standards or specific legal provisions in some jurisdictions.
The concept of purchase acquisition accounting was introduced by the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) in 2007 and 2008.
In the context of finance and business, the token of goodwill recognized under the purchase acquisition accounting method is a reflection of any premium paid over the book value of assets in a transaction, contrasting with the pooling of interests method where no goodwill is recognized. Furthermore, modern accounting standards often mandate the use of purchase acquisition accounting, rendering the pooling method less commonly used except in specific legal contexts or under older accounting standards.
