Amalgamation

Amalgamation:
Accounting Standard 14, deals with Amalgamation. Amalgamation is a combination of one or more
companies into a new entity. In financial terms, Amalgamation is a fusion between two or more
companies to consolidate their business activities by establishing a new company having a separate legal
existence.
Types or methods of Amalgamation and Method of accounting of amalgamation:
Methods or types of Amalgamation

a) Amalgamation in the nature of Merger
b) Amalgamation in the nature of Purchase
Amalgamation in the nature of Merger:

AS 14 provides following conditions for amalgamation in the nature of merger:
1) Assets and Liabilities: All Assets and liabilities of the transferor company after amalgamation become
the assets and liabilities of the transferee company.
2) Share Capital: Shareholders holding not less than 90% of the face value of equity share capital in the
transferor company become shareholders of the transferee company after amalgamation.
3) Discharge of Purchase consideration: The purchase consideration is discharged by the transferee
company fully by way of equity shares except the fractions which are issued by way of cash.
4) Business: The business of the transferor company is intended to be carried out by the transferee
company.
5) Book Value: No adjustments are to be made at book values of assets and liabilities except to ensure
the uniformity of the accounting policies.
b) Amalgamation in the nature of Purchase:
Amalgamation in the nature of purchase is described as an amalgamation which does no satisfies one or
more conditions of amalgamation in the nature of merger. In purchase method one company makes an
complete purchase of interests of the equity shareholders of another company.
Types or Methods of Accounting for Amalgamation:
a) Pooling of Interests Method:
This method is used when amalgamation is in the nature of Merger. This method has the following
features
1) Reserves, Assets and liabilities: All the reserves, assets and liabilities of the transferor company
should be recorded at the existing carrying amounts and in the same manner as at the date of
amalgamation in the transferee company’s financial statements.
2) Profit and Loss account: The balance of profit and loss account both companies should be merged or
transferred to general reserve account.
3) Accounting Policies: Uniform accounting policies should be followed in case of variation among both
the companies. The effect on the financial statement of such changes should be reported in accordance
with AS 5.
4) Share capital: The difference between the amount recorded as share capital issued (purchase
consideration) and the amount of share capital of the transferor company should be adjusted in
Reserves.
b) Purchase Method:
Methods of Amalgamation
As per guidelines of AS 14, the accounting of amalgamation is in nature of purchase is done by

“Purchase Method” having the following features:
1) Assets and liabilities: In this method the transferee company records the assets and liabilities on the
basis of either book value or fair value as agreed by them.
2) Profit and Loss account: The balance of profit and loss account of the transferor company need not be
carried forward.
3) Statutory Reserve: All statutory reserves of the transferor company should be recorded in financial
statement of the transferee company.
4) Purchase consideration and Net Assets: The excess amount of the purchase consideration and Net
Assets is debited to Goodwill account whereas the deficit is credited to Capital Reserve. However, AS 14
specifies that the amount of Goodwill should be written off within 5 years.
Purchase Consideration:
Purchase consideration refers to the consideration payable by the transferee company to the transferor
company for taking over the assets and liabilities of the company.
AS 14 defines the term purchase consideration as the “aggregate of the shares and other securities
issued and the payment made in the form of cash or other assets by the transferee company to the
shareholders of the transferor company”.
There are various methods of Computations of Purchase Considerations, which are given below:
Lumpsum Method: Under this method purchase consideration will be paid in lumpsum as per the
agreement of the companies valuations.
Eg: Y ltd takes over Z ltd for the amount of Rs. 20,00,000. Here Rs. 20,00,000 is he purchase
consideration.
Net Asset Method: Under the Net Assets Method, Purchase consideration is calculated by adding up all
the taken over assets on agreed value of the transferor company and deducting the taken over liabilities
at agreed value. If agreed value is not mentioned the value appearing in the books of the transferor
company should be taken into consideration. All Fictitious assets should be ignored
Net Payment Method: In this method, all payments made by the transferee company like Preference
shares, Equity shares and cash are added together to find out the purchase considerations
Eg: X ltd had taken over Y ltd and agreed to pay Equity shares of Rs. 4,00,000, Preference shares for Rs.
2,00,000 and cash Rs. 50,000
Intrinsic Worth Method: Under this method, purchase consideration is derived on the proportion in
which the shares of the transferee company are exchanged for the shared of the transferor company.
The ratio of exchange is usually determined on the basis of the Intrinsic or yield of shares.
Eg: A Ltd is absorbed by B ltd. It was decided that the holder of every 3 shares in A ltd was to receive 5
shares in B ltd

Amalgamation

Uploaded by

Copyright:

Available Formats

Amalgamation

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Amalgamation

Uploaded by

Copyright:

Available Formats

Amalgamation:

Methods or types of Amalgamation

Amalgamation in the nature of Merger:

b) Amalgamation in the nature of Purchase:

a) Pooling of Interests Method:

As per guidelines of AS 14, the accounting of amalgamation is in nature of purchase is done by

You might also like