Mergers of Trading Companies Under the Accounting Act Part 2

Leszek WOZIŃSKI
Audit Manager at RSM Poland

In my previous post, I discussed the acquisition method of merger accounting in detail. The second method I would like to offer some insight into today is the pooling of interests.

Mergers by the pooling of interests

In the case of a merger of companies where the existing shareholders do not lose control over companies after the merger, the pooling of interests method referred to in Article 44c of the AA can be applied. In particular, this applies to mergers of direct or indirect subsidiaries of the same parent company, as well as to mergers of a lower-tier parent company and its subsidiary.

The value of the share capital of a company whose assets have been transferred to another company, or of companies that have been deregistered following a merger is subject to exclusion. Following this exclusion, relevant items of the equity (usually the supplementary capital) of the company to which the assets of merged companies or the newly established company are transferred are adjusted by the difference between the total assets and liabilities.

Other exclusions are the following:

1. mutual receivables and liabilities and other similar settlements of merging companies;
2. revenues and costs of business transactions carried out in a given financial year before the merger between the merging companies;
3. profits or losses from business transactions carried out before the merger between the merging companies, included in the values of assets and liabilities to be merged.

Clearly, you do not have to make exclusions referred to in items 2 and 3 above, provided that this does not affect the reliability and clarity of the financial statements of the company to which the assets of the merged companies or of the newly formed company are transferred.

Any costs incurred in connection with the merger, including organisational costs incurred when setting up a new company or the costs of increasing the capital of the company to which the assets of merging companies are transferred, shall be classified as financial costs.

The financial statements of the company to which the assets of the merged companies or the newly formed company are transferred, prepared at the end of the reporting period during which the merger took place, include comparatives for the previous financial year. These shall be determined as if the merger took place at the beginning of the previous financial year, except that different components of equities at the end of the previous year shall be accounted for as a total of different components of equities.

Example (figures in PLN million)

Company X – acquirer

Company Y – acquiree

Figures for the X Company after merger

According to Appendix no 1 to the AA, the introduction to the financial statements for the period in which the merger took place, shall disclose the fact that this financial statement has been prepared after the merger of companies and name the method of merger accounting (purchase or pooling of interests) that was applied. However, according to paragraph 8 of the notes described in this Appendix, the following information shall be disclosed:

1) if the merger has been accounted for with the purchase method:

• name and description of the objects of the acquiree,
• number, nominal value and type of shares issued for the purpose of the merger,
• acquisition price, value of net assets at the fair value of the acquiree at the merger date, goodwill or negative goodwill and a description of the rules of its depreciation;

2) if the merger has been accounted for with the pooling of interests method:

• names and description of the objects of companies which have been deregistered following the merger,
• number, nominal value and type of shares issued for the purpose of the merger,
• revenues and expenses, profits and losses as well as any changes in the equity of the merged companies for the period from the beginning of the financial year during which the merger took place until the merger date.

According to IFRS 3 Business Combinations, there is no prescribed method of accounting for a combination of businesses under common control. For such transactions, both methods outlined above seem to be acceptable. However, the company should describe it properly in its accounting policy and/or consult, for example, an auditor who has some experience in IFRS application and interpretation.

Should you have any questions about mergers or need any assistance in this respect, we encourage you, as always, to contact RSM Poland experts.