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.