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Amalgamation

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Published in: Accountancy
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Amalgamation is an important topic as far as B.Com, CS- Exceutive, CMA- Inter, CA-IPCC and CA Final. Lets have quick look on basic accounting treatment of the same.

Amal P / Kochi

4 years of teaching experience

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Teaches: CA - CPT, CA - IPCC, CS - Foundation, Direct Tax Laws, Accountancy, Business Studies, Commerce Subjects, Costing, Auditing, Financial Management

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  1. Company Accounts Amal Paul Amalgamation The procedure for accounting for Amalgamation and the treatment of resultant goodwill or capital reserve is governed by AS 14- Accounting for Amalgamation. AS 14 is applicable to the transferee company and the accounting in the books of transferor company is done on the basis of GAAP. Types of Amalgamation In the nature of merger In the nature of purchase 1. 2. 3. 4. 5. Amalgamation in the nature of Merger As per AS 14, an amalgamation becomes ama gamatlon in th nature of merger if all of the following conditions are satisfied. All the assets and liabilities of the transferor company become, after amalgamation, the assets and liabilities of the transferee company. Shareholders holding not less -than 90% of face valu of the equity shares of the transferor company become equity shareholders of the transferee company by virtue of the amalgamation. The consideration for amalgamation receivable by those equity shareholders of the transferor company who agree to becom the sharehol ers of the transferee company is discharged by the transferee company wholly by the issue of equity shares in the transferee company, except cash may be paid in respect of any fractional shares. The business of the transferor company is intended to be carried on, after amalgamation, by the transferee company. and No adjustment intended to be made to the book values of the assets and liabilities of the transferor company when they are incorporated to the financial statements of the transferee company except to ensure uniformity of accounting policies. Amalgamation in the nature of Purchase If any one of the condition of amalgamation in the nature of merger is not satisfied, it will become Amalgamation in the nature of purchase. Methods of Accounting There are two methods for accounting for amalgamation. They are; a) Pooling of interest method (in case of amalgamation in the nature of merger) and b) Purchase method (in case of amalgamation in the nature of purchase) 1
  2. Company Accounts Pooling of interest method Amal Paul Under this method, the assets, liabilities and reserves of the transferor company are recorded by the transferee company at their existing carrying amounts. The identity of reserves are preserved. The difference between paid-up share capital of the transferor company and the purchase consideration is adjusted against reserve. In case of loss on amalgamation, it should be adjusted against reserves in the following manner; a) Against reserves of the transferor company b) Free reserves of the transferee company and ultimately c) Profit and loss account of the transferee company. Purchase method The assets and liabilities of the transferor company should be incorporated either at their existing carrying amount or the purchase consideration.hould be allocated to individual identifiable assets and liabilities on the basis of their fair value of amalgamation in the books of transferee company. If the purchase consideration is more than the value of net assets taken over, the difference should be treated as goodwill arising on amalgamatio and should be debited to Goodwill account. Such goodwill should be amortized over its use ul life subject to a maximum period of 5 year unless a somewhat longer period can be justified. If the purchase consideration is less than the value of net assets taken over, the difference should be treated a capital profit and should be transferred to Capital reserve account. If there is any statutory reserve in the books of the transferor company, it should be taken over by the transferee compan by passing the journal entry: Amalgamation Adjustment A/c To Sta utory Reserve A/c Dr. Amalgamation adjustment account should be shown under other current/ non-current assets as the uase may Computation of purchase consideration There are 4 methods for computation of purchase consideration 1. 2. Lump sum method The amount of purchase consideration is stated as a lump sum amount. Net Assets method Under this method, consideration is the net assets taken over, i.e. Assets taken over Less: Liabilities taken over 2 xxx (XXX)
  3. Company Accounts Amal Paul xxx 3. 4. Net Assets taken over/ Purchase Consideration Net payments method The consideration under this method is computed by adding total value of shares and other securities issued and payments made in the form of cash and other assets of the transferee company in discharge of consideration. Note: Any payments made by the transferee company other than the shareholders of the transferor company cannot be treated as part of consideration. E.g. Consideration paid to Debenture holders in settlement of their claim. Intrinsic value method/ share exchange method In this method, if the fair value of shares is not available, net assets is computed and the same shall be divided by number of shares in each company. On the basis o the ratio of shar yalue of both the companies, consideration is settled. Accounting entries in the books of the transferor company 1. 2. 3. 4. 5. 6. 7. Open realisation account and transfer all the assets except fictitious assets. Realisation A/c To Sundry Assets (Individually) Transfer all liabilities to Realisation A/c Sundry Liabilities (Individually To Realisation c Consideration be oming due Transferee Compan A/c To Realisation /c f any asset not taken ve realised Bank A/c o Reahsation A/c If any lia$llity not taken over settled Realisation A/c To Bank A/c r ( t their carrying amount) r Dr Dr Dr (At their book value) (With purchase consideration) (With realised value) (With the amount paid) Liquidation expense met by the transferor company Realisation A/c To Bank A/c Dr (With the amount of expenditure) If liquidation expense borne by transferor company later reimbursed by transferee company 3
  4. Company Accounts a. b. Expense met Transferee Company A/c To Bank A/c Amount reimbursed Bank A/c To Transferee Company A/c Dr Dr 8. 9. If liquidation expense met by transferee company No journal entry required Transfer of preference share capital % Preference Share Capital A/c To Preference shareholders A/c Dr 10. Transfer of Reserves and Equity Share Capital Amal Paul (With the amount of expenditure) (with the amount of expenditure) (With book yalue (With paid-up value) Equity Share Capital A/c General Reserve A/c Others Reserves (Individually Profit and loss A/c To Equity Shareholders A/c Dr Dr Dr 11. Transfer of fictitious assets and accumulated expenses Equity Shareholders A/c Dr To Profit and loss A/ o relimlnary Expenses A/c To Underwriting Commission A/c To Discount On issue of debentures A/c To Loss on redemption of shares/debentures A/c To Calls arrears A/c 12. Transfer o profit/ loss on realisation a. b. In case of profit Realisation A/c To Equity shareholders A/c In case of loss Equity shareholders A/c Dr Dr 4
  5. Company Accounts To Realisation 13. On receipt of consideration Equity shares in transferee company A/c Dr % Pref. shares in transferee company A/c Dr % Debentures in transferee company A/c Dr Amal Paul Bank A/c To Transferee company A/c Dr 14. On payment of consideration to Preference shareholders Preference shareholders A/c Dr To Equity shares in transferee company A/c To _ % Pref. shares in transferee company A/c To _ % Debentures in transferee company A/c To Bank A/c Note: Entry is passed according to the settlementmethod. 15. Any balance in Preference shareholders A/c a. b. In case of debit balance Equity Shareholders A/c To Preference hareholders In case of credit balanc Preference Shareholders c To Equity hareholderyA/c Dr Dr Note: Ba ance in re erence shareholders/ Debenture holders A/c occurs when they are paid more o less than their right. The difference in any case should be transferred to Equity shareholders A/c 16. Settlement to equity shareholders Equity shareholders A/c Dr To Equity shares in transferee company A/c To _ % Pref. shares in transferee company A/c To _ % Debentures in transferee company A/c To Bank A/c Note: After settlement to Equity shareholders, no balance should be there in any account. The payment made to equity shareholders should be always be equivalent to the purchase consideration (After giving the share to preference shareholders) 5

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