the combining enterprises combine control over the whole, or effectively the whole,
of their respective net assets and operations to achieve a continuing mutual sharing
in the risks and benefits attaching to the combined entity such that neither party can
be identified as the acquirer.
The Standards set three tests that must be met before the combination can be ac-
counted for as a pooling. These tests are:
1.The shareholders of the combined entity must achieve a continuing mutual
sharing of the risks and benefits attaching to the combined entity.
2.The basis of the transaction must be principally an exchange of voting common
shares of the entities involved.
3.The whole, or effectively the whole, of the net assets and operations of the com-
bining entries are combined into one entity.The first of these three criteria relates to the continual sharing of risks and bene-
fits by the combined shareholder groups. To meet this test, the following must occur
according to the IAS:
- The substantial majority, if not all, of the voting common shares of the combin-
ing entities are exchanged or pooled. - The fair value of one entity is not significantly different from that of the other
entity. - The shareholders of each entity maintain substantially the same voting rights
and interest in the combined entity, relative to each other, after the combination
as before.
IAS 22 states that “the shareholders of the combining enterprises join in a sub-
stantially equal arrangement to share control over the whole, or effectively the whole,
of their net assets and operations.” Further, it states that to achieve such a mutual
sharing of risks and benefits, “the fair value of one enterprise [cannot be] signifi-
cantly different from that of the other.” This makes it seem that merger of entities of
at least somewhat differing sizes can be accounted for as poolings if other terms
stated are met.
The Standing Interpretations Committee (SIC) has offered a set of observations
that support the notion that true unitings of interests rarely occur in practice. SIC 9
notes that business combinations must be accounted for as either acquisitions or unit-
ings of interest, and that most such transactions are expected to be acquisitions, with
only those for which an acquirer cannot be identified qualifying for unitings of inter-
ests accounting.
(iii) Business Combinations in Other Countries. Only the purchase method of ac-
counting for business combinations is permitted in Australia, Canada, Japan, Mexico,
and South Africa. Accounting in these countries does not permit the use of the pool-
ing-of-interest method under any circumstances. Canada has adopted basically the
same standards as the United States. In Israel, pooling accounting is in theory al-
lowed in very special circumstances, but it is almost never used in practice. In Hong
Kong, pooling is permitted, but no specific guidance exists, and therefore it is almost
never applied. In the Netherlands and New Zealand pooling is permitted only when
18.6 BUSINESS COMBINATIONS 18 • 19