Merger and Acquisition Accounting

Merger and Acquisition Accounting is done either by Purchase Method or by Pooling of Interests Method. There are some differences between these two accounting methods which are discussed in the following page.

Merger and Acquisition Accounting is done by using mainly two methods.

These two methods are the following:

Purchase Method

Pooling of Interests Method

Purchase Method

In this method, the asset and liabilities of the merged company are presented at their market values as on the date of acquisition.

This is done in order to ensure that the resulting values of the accounting process are able to reflect the market values. Here, we are talking about the market value which was recorded before the final settlement of the acquisition deal that is the at the time of bargaining.

In this process of Merger and Acquisition Accounting, the total liabilities of the joint company equals the sum of individual liabilities of the two separate firms. In this case, the purchase price determines the amount by which the acquiring firm's equity is going to increase.

But, there are some drawbacks of this Purchase Method. When Merger and Acquisition Accounting is done through this Purchase Method, then there is a chance of over rating the Depreciation Charges. This is because, in Purchase Method, book value of assets are used in accounting, but the book value of assets is generally lower than the fair value if there is inflation in the economy.

Pooling of Interests Method

In this method of Accounting, transactions are considered as exchange of equity securities. Here, assets and liabilities of the two firms are combined according to their book value on the acquisition date. In this Pooling of Interests Method of accounting, total asset value of the joint company equals the sum of assets of the separate firms. In this case, the accounting income is found to be higher than in purchase accounting method as the depreciation in pooling method is calculated on the basis of historical book value of assets.