PIC Q&A No. 2012-01: Pooling of interest method on common control business combination

Advertisements

PIC Q&A No. 2012-01: PFRS 3.2 – Application of the Pooling of Interests Method for Business Combinations of Entities under Common Control in Consolidated Financial Statements was approved by Financial Reporting Standard Council and is effective for annual financial statements beginning on or after January 1, 2013.  Earlier application is encouraged. (See Exercise below)

Issues being addressed by this Q&A are as follows:

1. What carrying values shall an entity use when applying the pooling of interests method for common control business combinations in its consolidated financial statements?

2. Is an entity required to restate the financial information in its consolidated financial statements for business combinations under common control for periods prior to the combination, if it elects to apply the pooling of interests method?

Advertisements

3. If the entity elects not to restate financial information in the consolidated financial statements for periods prior to the business combination, how shall the equity reserves, if any, be accounted for?

This Q&A does not address legal mergers between a parent and a subsidiary.

To summarize, following are the gist of the discussions in PIC Q&A No. 2012-01:

Issue 1: Carrying values to use for assets and liabilities

There are two available approaches for determining what carrying values to use when applying the pooling of interests method, namely:

Approach 1: To use the carrying values reported in the consolidated financial statements of the parent.

Approach 2: To use the carrying values reported at the level of the separate financial statements of the combining entities. This Approach 2, however, may be appropriate when the specific factors noted below are present.

Issue 2: Restatement or non-restatement of financial information in consolidated financial statements for periods prior to the date of the business combination

In applying the pooling of interests method, an entity has two approaches to choose from:

Approach 1: To restate the financial information in the consolidated statements for periods prior to the transaction.

Approach 2: Not to restate the financial information in the consolidated financial statements for periods prior to the transaction.

An entity must consistently apply the chosen accounting policy

Issue 3: Accounting for equity reserves when the entity elects not to restate financial information in the consolidated financial statements for periods prior to the transaction

When an entity has opted not to restate the financial information in the financial statements for periods prior to the transaction, and the ‘acquired’ entity has equity reserves, it has the following two approaches to choose from to determine what value to assign to such equity reserves:

Approach 1: To carry over the equity reserves at ‘pooling of interests values’ that reflect the application of pooling of interests method.

Approach 2: To carry over the equity reserves at book values considering the transaction as an initial recognition of net assets.

An entity must consistently apply the chosen accounting policy.

In the current business setting, common control business combinations have become widespread and knowledge on how to properly account these business combinations have been increasingly significant.

Click here to download PIC Q&A No. 2012-01: Pooling of interest method on common control business combination.

Exercise

P Company acquired S1 Company having property, plant and equipment in its books with a book value of P100 million at the date of acquisition and fair value of P150 million (which was the value recorded in the consolidated FS of P Company).  On the same year, P Company incorporated S2 Company. 

Years later, P Company decided to restructure its business by consolidating S1 Company to S2 Company (S1 Company will become a subsidiary of S2 Company).  Since it is a common control business combination, it was accounted using pooling of interest method. On that year, the fair of the property, plant and equipment of S1 Company amounted to P130 million while the book value in S1 Company’s books is P85 million.  On the same date, the amount of property, plant and equipment in the consolidated financial statements of P Company is P110 million.

What is the value of property, plant and equipment of S1 Company to be included in the consolidated financial statements of S2 Company?

What is the value of property, plant and equipment of S1 Company to be included in the separate (parent) financial statements of S2 Company? Comment to answer!

Tell us what you think. 🙂


Disclaimer: Opinions expressed in this article are that of the author and information provided are for general conceptual guidance for public information and are not substitute for expert advice. Contact support@philcpa.org for more information and if you want to avail professional services. Find us on Facebook!



Orlando Calundan is a CPA who has exposures in FS audit of entities in various industries such as real estate, food/restaurants, manufacturing, service organizations and BPOs, automotive, holding/investment companies and more. He also has exposure on internal audit engagements.

What are you searching for?


Let us help you! Enter your 'search key word' to search an article / topic!