Merger and acquisition accounting is done either by the purchase or pooling of interests methods. There are some differences between these two accounting methods which are discussed in the following page.
Purchase Method
The asset and liabilities of the merged company are presented at their market values as on the date of acquisition, in order to ensure that the resulting values of the accounting process are able to reflect the market values. This refers to the value, which was recorded before the final settlement of the acquisition deal at the time of bargaining.
In this process, the total liabilities of the joint company equals the sum of individual liabilities of the two separate firms. The purchase price then determines the amount by which the acquiring firm's equity is going to increase.
However, one of the drawbacks with purchase method is the chance that it may overrate depreciation charges.
This is because the book value of assets used in accounting is generally lower than the fair value if there is inflation in the economy.
Pooling of Interests Method
In this method, 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. The 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 the purchase method, as the depreciation in the pooling method is calculated based on the historical book value of assets.
