Accounting For Amalgamation

Today we are going to talk about Amalgamation which is the most important topic for the students of accounting.


Amalgamation-

When two or more than two existing companies join to form a new company we called it as amalgamation. In the process of amalgamation existing companies loose their existence and the new company is created.

Suppose you are running your company (may be limited or private limited) which is in the business of cement manufacturing, you also have the lots of competitor who have the same business. one day you and one of your competitor agrees to merge(join) and form new company. The process is called amalgamation.

Accounting standard 14 and Amalgamation:

AS 14 defines Amalgamation as “Amalgamation means Amalgamation pursuant to the provision of company act 1956 or any other statue which may be applicable to the companies”.  

Amalgamation and Income tax:

Income tax defines Amalgamation as “Merger of one or more companies with another companies or merger of two or more than two company to form one company in such a manner that:

1) All the assets and liabilities of amalgamating companies immediately before the amalgamation become the properties of amalgamated company by the virtue of amalgamation.

2) Shareholder holding at least 3/4^th in the value of shares in the amalgamating companies become the shareholder of amalgamated company by the virtue of amalgamation”.

Transferor company (Amalgamating) and Transferee company (Amalgamated:

Before proceeding further, we need to understand the meaning of these two terms. The company that is transferring its assets and liabilities to another company by the virtue of amalgamation, we called it as transferor company (also called Amalgamating company) and the company in which it is been transferred is called transferee company (also called amalgamated company).

Take an example, X ltd and Y ltd are dissolve and new company XY ltd is formed. Here x ltd and y ltd are transferor company and new company XY ltd is called transferee company.

Now, why  amalgamation is done?

The reason is to gain the market shares in production that is to increase their production capacity and become the leader in their industry. Another reason is to eliminate competition and have the economies of large scale production. Apart from that, widening of product range, market penetration, and enhancement of technical know-how are also some of the reasons.

100 years of stock market shows us that amalgamation can also be created to hide accounting fraud. Sometimes it is seen that whenever any fraud has occurred, there was a frequent acquisition or amalgamation taking place on the part of the company. so these are some points that should be kept in mind by good accountant.



 Amalgamation and Acquisition:

There is a difference between these two terms. Acquisition occurs when one existing company takes over another existing company. Suppose, x ltd purchase y ltd, by paying some payment ( legally called purchase consideration, ) we called it as acquisition. Here x ltd is absorbing Y ltd and thus Y ltd has been dissolved or liquidated. Therefore, shareholders of Y ltd become the shareholders of x ltd.

        In the case of Amalgamation, there must be two or more existing companies that merge into the new company but in the case of acquisition, there can be one existing company that absorbs (yes absorption and acquisition have similar meaning) another existing company.



Amalgamation and External Reconstruction:



External Reconstruction takes place when new company is formed to take over an existing company. When x ltd is wounded up and with its assets and liabilities a new company Y ltd is formed,, the process is called external reconstruction. With these examples, it is clear that amalgamation and external reconstruction has some difference.

Purchase consideration:

Purchase consideration is the total payment made by transferee company to the transferor company for the assets and liabilities taken over by it. If X ltd acquires all the assets and liabilities of Y ltd and because of that total payment given to Y ltd is $100,000 then this amount is called purchase consideration. So in short, purchase consideration is the total payment that is made to purchase the business. Purchase consideration can be in the form of shares, other securities or in the form of cash or assets.

 Accounting for Amalgamation as per AS 14:

Accounting standard- 14 deals with accounting for amalgamation. The standard says that amalgamation can be of two types.

1) Amalgamation in the nature of merger.

2)Amalgamation in the nature of purchase.

There are some criteria which must be followed to regard amalgamation in the nature of merger.

1) All the assets and liabilities of transferor company become after amalgamation, the assets and liabilities of transferee company.

2) Not less than 90% of the shareholder of transferor company become after amalgamation, the shareholder of transferee company.

3) All the assets and liabilities of transferor company are transferred at book value.

4) There should be an intention of transferee company to run the existing business of transferor company after amalgamation.

5) Purchase consideration given to the shareholder of transferor company should be in shares except some cash can be given for fraction of shares.

All the five conditions mentioned above must be satisfied otherwise, it would be regarded as Amalgamation in the nature of purchase.

Accounting in the case of amalgamation in the nature of Merger:

Pooling of interest method is used in accounting for amalgamation in the case of merger. Under this method, transferee company does not make any changes to the asset and liabilities of transferor company. That is, they are not taken at their revalued amount but are taken at the book value. All the reserves should also be transferred whether it is capital reserve, general reserves or statutory reserves. All the five conditions stated above apply to this method.

We must note that the difference between purchase consideration and the share capital will be adjusted with the Reserves of the transferor company.

Let us take an example, take a look at the following Balance sheet of transferor company:

Liabilities		Amount
Share capital		1,00,000
Reserves and surplus		80000
Debenture		60000
Creditors		40000
Total		280000
Assets		Amount
Land & Building		115000
Plant and Machinery		85000
Debtors		20000
Stock		50000
Cash		10000
Total		280000

Suppose, the purchase consideration given by the transferee company is $120000, then the journal Entries in the books of transferee company would be:

Particular	Amount	Amount
Land &Building a/c             Dr	115000
Plant & Machinery a/c       Dr	85000
Debtors                                    Dr	20000
Stock                                          Dr	50000
Cash                                           Dr	10000
To, Creditors		40000
To, Debenture		60000
To, Reserve and surplus (80000-20000)		60000
To, purchase Consideration		120000

Here in the above balance sheet we can see that the difference between share capital and purchase consideration is adjusted with reserve and surplus.

Accounting in the case of Amalgamation in the nature of purchase:

Purchase method is used to account for amalgamation in the nature of purchase. Under this method, all the assets and liabilities of transferor company is taken at the revalued amount and not on the book value. The adjustment should be made either on the goodwill or with capital reserve. Suppose, If net asset (that is excess of asset over liability) is more than purchase consideration then the difference will be recorded in capital reserve account. On the other hand, if purchase consideration is more than the net asset then the difference will be recorded in goodwill account.

In the purchase method, not all the liabilities are recorded in the books of transferee company, only the outside liabilities are recorded. Similarly, fictitious assets are not recorded in the books of the transferor company.

Take an example, Following is the balance sheet of transferor company:

Liabilities		Amount
Share capital		1,00,000
Reserves and surplus		80000
Debenture		60000
Creditors		40000
Total		280000
Assets		Amount
Land & Building		115000
Plant and Machinery		85000
Debtors		20000
Stock		50000
Cash		10000
Total		280000

 

Suppose also that Land and building is revalued at 150000 and Debtors at 50000; and purchase consideration discharged is $250000

Then the journal entries in the book of transferee company would be:

Particular	Amount	Amount
Land &Building a/c             Dr	150000
Plant & Machinery a/c       Dr	85000
Debtors                                 Dr	50000
Stock                                      Dr	50000
Cash                                        Dr	10000
Goodwill                                Dr	5000
To, Creditors		40000
To, Debenture		60000
To, purchase Consideration		250000

 

Here we can see that the excess purchase consideration (250000) over net asset (245000) is adjusted with Goodwill.

 So that was all about amalgamation hope you have understood a lot on this concept. if you have any queries relating to this matter, write me on the comment box below.