Amalgamation VS Absorption
Amalgamation VS Absorption
Amalgamation VS Absorption
The fact that differentiates an acquisition from amalgamation is that the acquired
company is not dissolved. That is, it continues to exist as a separate legal entity.
Amalgamation VS Absorption:
External Reconstruction :
In other words, external reconstruction refers to the sale of the business of existing
company to another company formed for the purposed. In external reconstruction,
one company is liquidated and another new company is formed.
Types of Amalgamations
There are broadly two categories of amalgamations. These include:
Upon amalgamation, all assets and liabilities of the transferor company become the
assets and liabilities of the transferee company. Here the Transferor Company
means the company that gets amalgamated into another company. On the other
hand, the Transferee Company is a company into which the Transferor Company
gets amalgamated.
Shareholders having not less than 90% of the face value of equity shares of the
Transferor Company (these shares do not include equity shares that are held in the
Transferor Company by the Transferee Company, their subsidiaries or nominees
immediately before amalgamation) become the equity shareholders of the
Transferee Company by the way of amalgamation.
The shareholders of the Transferor Company who get ready to become equity
shareholders of the Transferee Company receive consideration. Such a
consideration is given wholly in the form of equity shares in the Transferee
Company. However, cash may be paid with regards to any fractional shares.
Upon valuation, business of the Transferor Company is intended to be carried out
by the Transferee Company .
No changes or adjustments are intended to be made in the book values of assets
and liabilities of the Transferor Company when such assets and liabilities are
consolidated in the financial statements of the Transferee Company. Such
adjustments however are made only for maintaining uniformity of accounting
polices.
Thus, in this case, there is a genuine pooling of not only the assets and liabilities of
the amalgamating companies but also of the shareholders interests and the
businesses of such companies.
Therefore, the accounting treatment for the amalgamations in the nature of merger
should confirm that the resulting figures of assets, liabilities, capital and reserves
represent the total of relevant figures of the amalgamating companies.
Furthermore, the impact of such changes in the accounting policies on the financial
statements is reported as per AS 5, that is, prior period and extraordinary items and
changes in accounting policies.
1. Purchase Method
There are two ways in which Transferee Company accounts for Amalgamation
under the purchase method. These include accounting for amalgamation:
Consideration
The consideration paid upon amalgamation to the Transferor Company can
comprise of securities, cash or other assets. In order to ascertain the amount of
consideration, the fair value of each of its components is calculated.
There are a number of techniques that are used to determine the fair value. For
instance, in case the consideration comprises of securities, the value fixed by the
statutory authorities may be taken as the fair value of such securities.
Likewise, where the consideration comprises of assets, fair value is assessed by
making a reference to the market value of the assets that are given up. In case, the
market value of the assets given up cannot be assessed reliably, then assets are
taken at their respective net book values.
For instance, the General Reserve recorded in the financial statements of the
Transferor Company is recorded as General Reserve in financial statements of the
Transferee Company upon Amalgamation.
Thus, any difference arising between the share capital issued and the amount of the
share capital of the Transferor Company gets adjusted in the reserves of the
financial statements of the Transferee Company.
Statutory Reserves are the reserves that are required to be maintained in order to
comply with a specific statute. Transferor Company may create certain reserves
either to comply with or claim benefits under Income Tax Act, 1961.
The identity of such reserves need to be preserved for a specific period as per the
Act. Similarly, there may be other reserves created by the Transferor Company in
its financial statements to comply with the requirements of some other statutes.
Although, the identity of reserves is typically not preserved in case of
Amalgamation in nature of purchase, an exception is made with regards to
statutory reserves.
Furthermore, such reserves retain their identity for a period it must be retained so
as to comply with the specific statute.
It must be noted this exception of the Statutory Reserves is made in only those
amalgamations where the requisites of the specific statute for recording such
statutory reserves in the books of the Transferee Company are met.
Owing to the nature of goodwill, it is difficult to determine the useful life of goodwill
with reasonable certainty. As a result, such a determination is made on a prudent
basis.
However, in some cases, the scheme of amalgamation under a specific statute may
suggest a different treatment for reserves of Transferor Company after
amalgamation vis-a-vis the requirements of this accounting standard which could
have been followed had there been no suggestion made by the scheme.
In these cases, the stakeholders need to make the following disclosures after
amalgamation in the first financial statements:
Disclosure
Following are the disclosures that need to be made in the first financial statements
after the amalgamation:
Description and number of shares issued along with percentage of each companies
equity shares exchanged for amalgamation
Amount of any difference between consideration and value of net identifiable
assets acquired and its treatment
In case of amalgamations that are accounted via Purchase Method, following
additional disclosures must be made in the first financial statements after the
amalgamation: