ACCOUNTING FOR AMALGAMATION AS PER ACCOUNTING STANDARD 14

ACCOUNTING FOR AMALGAMATION

Amalgamation means the liquidation of one or more companies and transfer of business of liquidated entities to another entity. There may be amalgamation either transfer of two or more undertakings to an existing company or new company.

Scope

Accounting Standard 14 “accounting for amalgamations” issued by ICAI, is applicable for Transferee Company (Buying Company). Let us understand some basic terms

Transferor Company: A company which is amalgamated into another company. The company selling its business is known as “Transferor Company”  

Transferee Company: A company into which a transferor company is amalgamated. The company buying other company is known as “Transferee Company”

Purchase Consideration: The consideration paid by the transferee company for the purpose of amalgamation. Purchase consideration may be in the form of Equity shares, preference shares, Debentures, Cash etc. There is no limit for fixing the price of Transferor Company it can be at discount, it can be at Par or premium. Usually intrinsic value of shares is taken into consideration for computing the purchase consideration.


Types of Amalgamation: 

As per Accounting standard 14 issued by ICAI there are two broad categories for accounting of amalgamation.
  • Amalgamation in nature of merger
  • Amalgamation in nature of purchase

     

Amalgamation in nature of merger:

There are five specific conditions to satisfy that amalgamation is in nature of merger and the five conditions have to be satisfied. Even if one condition is not satisfied then the nature of amalgamation is treated as purchase.
The conditions are as follows
  1. All the assets and liabilities of the transferor company (Selling Company) become the assets and liabilities of the transferee company (Purchasing Company) after amalgamation.
  2. Shareholders of selling company holding not less than 90% of the face value of equity shares become the shareholders of purchasing company by virtue of amalgamation.   
  3. The Consideration paid to equity shareholders of the selling company is in the form of Equity shares.(Except in case of fractional shares the consideration is paid in cash)
  4. The Business of the selling company is intended to be carried on by the purchasing company after amalgamation.
  5. Assets and liabilities of selling company were taken at book value (no changes has to be made to book values of selling company.

Note: If the nature of amalgamation is merger then the method of accounting is pooling of Interest

Amalgamation in nature of Purchase:

If any one or more conditions pertaining to merger listed in the above are not satisfied then in that case the nature of amalgamation is treated as purchase. Even if one condition of merger is not satisfied, it amounts to purchase.

Note: If the nature of amalgamation is Purchase then the method of accounting is Purchase method

Method of Accounting


Nature of Amalgamation
Method of Accounting
Merger
Pooling of Interest Method
Purchase
Purchase Method

Pooling of Interest Method

Under this method the assets, liabilities and all reserves of the selling company are recorded by purchasing company at their existing book value.(The amount can be adjusted to follow uniform set of accounting policies)

The reserves of the selling company are also to be recorded subject to adjustments given below.

The difference between purchase consideration and paid up capital of selling company is to be adjusted as follow:

Excess of consideration paid over paid up share capital (equity and preference) is to be adjusted against:
  1. Free reserves of selling company
  2. Secondly against free reserves of purchasing company
  3. Lastly, debit profit and loss A/C.


Where the consideration paid is less than paid up capital, the difference is to be credited to capital reserves of purchasing company after amalgamation.
Let us take small illustration in various scenarios:
                         
     Balance sheet of selling company
Liabilities
Amount
Assets
Amount
Share capital
500000
Fixed assets
1250000
Reserves
500000
Current assets
250000
Current Liabilities
500000


Total
1500000
Total
1500000
          Note: Nature of amalgamation is merger     

          Consideration paid by selling company
Case I
Case II
Case III
Case IV
5,00,000
9,00,000
11,00,000
4,00,000

          Treatment of Reserves as per pooling of interest method
Sl.no
Particular
I
II
III
IV
1
Purchase Consideration
5,00,000
9,00,000
11,00,000
4,00,000
2
Paid up share capital of selling company
5,00,000
5,00,000
5,00,000
5,00,000
3
Excess of 1 over 2
NIL
4,00,000
6,00,000
-1,00,000
4
Adjustment of the above (3) excess against:-
Free reserves* of selling company
Free reserves* of purchasing company



NIL


NIL



-4,00,000



-5,00,000


-1,00,000



NIL


NIL
5
Balance of selling company reserves to be incorporated.
Free reserves
Capital reserves




5,00,000





1,00,000





NIL




5,00,000
1,00,000
      *Free reserves = General reserve and Profit and loss A/C credit balance.               (Excluding Statutory Reserves)

    Journal entry in the books of purchasing company for above cases
   
Particular
Debit
Credit

Case I
Fixed Assets A/C      Dr
Current Assets A/C    Dr
        To Current Liabilities A/C
        To General Reserve  A/C
        To Business Purchase A/C


1,25,0000
 2,50,000




5,00,000
5,00,000
5,00,000
Case II
Fixed Assets A/C      Dr
Current Assets A/C    Dr
        To Current Liabilities  A/C
        To General Reserve   A/C
        To Business Purchase A/C


1,25,0000
 2,50,000




5,00,000
1,00,000
9,00,000
Case III
Fixed Assets A/C      Dr
Current Assets A/C    Dr
Profit & Loss A/C      Dr
        To Current Liabilities  A/C
        To General Reserve   A/C
        To Business Purchase A/C


1,25,0000
 2,50,000
 1,00,000





5,00,000
   NIL
11,00,000
Case IV
Fixed Assets A/C      Dr
Current Assets A/C    Dr
        To Current Liabilities  A/C
        To General Reserve   A/C
        To Business Purchase A/C
        To Capital Reserve A/C  

1,25,0000
 2,50,000




5,00,000
5,00,000
4,00,000
1,00,000

Purchase Method

Under this method the assets and liabilities of the selling company are recorded by purchasing company in either two ways
  at their existing book value;
  the purchase consideration should be allocated to individual identifiable assets and liabilities on the basis of their Fair value(agreed value) at the date of amalgamation

  1. Non- statutory reserves of selling company are not be taken by purchasing company,
  2. Only statutory reserves have to be maintained by purchasing company as prescribed by the required statute, the same is not considered for purchase consideration computation.

        Journal entry will be:-

             Amalgamation adjustment A/C   Dr    XXX
                      To Statutory Reserve A/C               XXX
  
 The difference between purchase consideration and net assets of selling  company is to be shown as follow:

  1. Where the consideration paid is less than net assets, the difference is to be credited to capital reserves of purchasing company after amalgamation.
  2. Where the consideration paid is more than net assets, the difference is to be debited to goodwill of purchasing company after amalgamation.


Note: Net Assets = Sum of assets taken over at fair values – Liabilities taken over at agreed amounts

Let us take small illustration in various scenarios:

                              Balance sheet of selling company
Liabilities
Amount
Assets
Amount
Share capital
500000
Fixed assets
1250000
Reserves
500000
Current assets
250000
Current Liabilities
500000


Total
1500000
Total
1500000
          Note: Nature of amalgamation is merger     

          Consideration paid by selling company
Case I
Case II
Case III
Case IV
15,00,000
11,00,000
10,00,000
4,00,000

         Computation of Goodwill/Capital reserve as per purchase method
Sl.no
Particular
I
II
III
IV
1
Purchase Consideration
15,00,000
11,00,000
10,00,000
4,00,000
2
Net assets of selling company
10,00,000
10,00,000
10,00,000
10,00,000
3
Excess of 1 over 2
 5,00,000
1,00,000
NIL
-6,00,000
4
Capital Reserve in
NIL
NIL
NIL
6,00,000
5
Goodwill
5,00,000
1,00,000
NIL
NIL
      *Free reserves = General reserve and Profit and loss A/C credit balance.            
    Journal entry in the books of purchasing company for above cases
   

Particular
Debit
Credit

Case I
Fixed Assets A/C      Dr
Current Assets A/C    Dr
Goodwill A/C          Dr
        To Current Liabilities A/C
        To Business Purchase A/C


12,50,000
 2,50,000
 5,00,000





5,00,000
15,00,000

Case II
Fixed Assets A/C      Dr
Current Assets A/C    Dr
Goodwill A/C          Dr
        To Current Liabilities  A/C
        To Business Purchase A/C


12,50,000
 2,50,000
 1,00,000




 5,00,000
11,00,000
Case III
Fixed Assets A/C      Dr
Current Assets A/C    Dr
        To Current Liabilities  A/C
        To Business Purchase A/C


1,25,0000
 2,50,000





5,00,000
10,00,000
Case IV
Fixed Assets A/C      Dr
Current Assets A/C    Dr
        To Current Liabilities  A/C
        To Capital Reserve  A/C
        To Business Purchase A/C
      

1,25,0000
 2,50,000




5,00,000
6,00,000
4,00,000




In our next article we are going to learn journal entries in books of selling company and purchasing company in the event of amalgamation.

Comments

  1. For absorption and external reconstruction also same method n journal entries are used?

    ReplyDelete

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