The pooling of interests method for business combinations

This article answers the following questions:

• When is it possible to adopt the pooling of interests method for business combinations?
• How to account for business combinations in financial statements?
• How are the costs of business combinations treated?

Business combinations where the current shareholders of combining entities retain control over them can be accounted for in accordance with the pooling of interests method, as referred to in Article 44c of the Polish Accounting Act. These regulations apply predominantly to combinations of subsidiaries of a common parent entity, controlled directly or indirectly, or to mergers of an intermediate parent entity with its subsidiary. How should these operations be accounted for in company records and financial statements?

Exclusions in the statements of entities combining by pooling of interests

When accounting for business combinations by pooling of interests, accountants must remember that the share capital of companies whose assets are transferred to another entity (or of companies which have been struck off the register as a result of the combination) is subject to exclusion.

Following the said exclusion, respective items of the equity (typically the supplementary capital) of the entity to which the assets of the combining companies are transferred or of the newly formed entity are adjusted in the financial statements by the difference between total assets and liabilities.

The following items are also excluded from the accounts:

1. mutual payables and receivables of the combining entities as well as other similar settlements;
2. revenues from and costs of business transactions carried out, in a given fiscal year, between the combining entities before their combination;
3. gains or losses from business transactions carried out between the combining entities before their combination, included in the values of assets and liabilities that are being combined.

In accordance with Article 44c(4) of the Polish Accounting Act, an entity may refrain from making the exclusions referred to in points 2 and 3 above if there is no impact on the accuracy and fairness of the financial statements of the company to which the assets of the combining entities are transferred (or of the statements of the newly formed entity).

Costs associated with the combination – including the formation costs of the newly established entity or the costs of increasing the capital of the company to which the assets of the combining entities are transferred – are in turn recognised as financial expenses (as set out in Article 44c(5) of the Accounting Act).

Accounting for business combinations in financial statements

The financial statements of the company to which the assets of the combining entities are transferred (or of the newly formed entity) are prepared in the usual term – at the end of the reporting period within which the combination took place – and have to include the comparative data for the entity's previous fiscal year. 

The financial statements have to show the comparative data in such a way as if the business combination by pooling of interests took place at the beginning of the previous fiscal year, but individual items of the equities of the companies as at the end of the previous year should be shown as the total of the individual items of the equities.

Company X – the acquirer

Company Y – acquiree

Data of company X after combination

In accordance with Annex 1 to the Accounting Act, the introduction to the financial statements for the period within which the combination took place has to contain information that the financial statements have been following a business combination and specify the accounting method of the combination (by acquisition or pooling of interests). 

In addition, as per point 8 of Annex 1, the financial statements of the entity must also show the following information:

1. In the case of a business combination by acquisition:
   1. the name and description of the objects of the acquiree;
   2. the number, nominal value, and type of shares issued for the combination purpose;
   3. the price of the acquisition of the company, net assets according to the fair value of the acquiree as at the combination date, and goodwill or negative goodwill together with the specification of its amortisation rules.
2. In the case of a business combination by pooling of interests:
   1. the name and description of the objects of the companies which have been struck off the register as a result of the combination;
   2. the number, nominal value, and type of shares issued for the combination purpose;
   3. the revenues and costs, gains and losses, and changes in the equities of the combined entities for the period from the beginning of the fiscal year in which the combination took place to the combination date.

Business combinations according to IFRS 3

The International Financial Reporting Standard 3 currently in effect does not clearly define the accounting method to be applied to business combinations under common control.

This means that, in practice, both methods – the acquisition method and the pooling of interests method – seem to be admissible in the context of such transactions as long as they are properly justified and in compliance with accounting principles. To make sure that all regulations are observed, the issue in question should be adequately described in the accounting policy of the company or consulted with an auditor who is experienced in the application and interpretation of IFRSs. By taking advantage of such services, companies may avoid potential errors and take care that the adopted solutions are in conformity with the standards in force and follow best business practice. In the current regulatory environment, in which transparency and compliance are of considerable importance, the right approach to such transactions is crucial both for executives and stakeholders.