Accounting Standard – 14
Amalgamation of Companies
1.
Amalgamation means:
Combining of resources by two or
more organization for making one single organization It includes the following:
Amalgamation
When two or more companies
liquidate and new company is formed to takeover the business of liquidated
companies, it is called amalgamation.
Absorption
When an existing company is
liquidated and its business is taken over by another existing company, it is
called absorption.
External
Reconstruction
When one existing company is
liquidated and a new company is formed to take over the business of liquidated
company, it is called external reconstruction.
2.
TYPES OF AMALGAMATION
As per the provision of AS- 14, Amalgamation may be:
1.
In the
nature of Merger
2.
In the
nature of Purchase
Amalgamation in the Nature
of Merger:
As per the provision of AS- 14, amalgamation will be in
the nature of merger if the following conditions are satisfied in totality.
(i)
All the assets and all the liabilities of
Transferor Company (Vendor Co.) become the Assets and liabilities of Transferee
Company (Purchasing Co.) after amalgamation.
(ii)
Shareholders holding at least 90% of the
face value of the equity shares of the transferor company (other than the
equity shares which are already held by the transferee company or its
subsidiary companies or their nominees, immediately before amalgamation) become
equity shareholders of the transferee company by virtue of the amalgamation.
(iii)
The consideration is wholly discharged by
issue of equity share of the transferee company to the shareholders of
Transferor Company.
(iv)
The business of the transferor company must
be carried on by the transferee company.
(v)
All the assets and all the liabilities of
the transferor company must be recorded at the book value in the books of
account of Transferee company. But adjustment can be done if the accounting
policies are to be made uniform. E.g. SLM to WDV or vice a versa.
Amalgamation in the Nature
of Purchase:
When anyone or more of
the conditions of amalgamation in the nature of merger does not satisfy
then it is called amalgamation in the nature of purchase/
Method of Accounting
1. Pooling of Interest Method
This method is used when
amalgamation is in the nature of merger.
2. Purchase method
This method is used when
amalgamation is in the nature of purchase
Pooling of Interest Method
(i)
Under this method all the assets and
liabilities of the transferor company are recorded in the books of accounts of
Transferee Company at their book value.
(ii)
Reserve is recorded at their existing
carrying amount and in the same form (whether capital or revenue reserve)
(iii)
The balance of profit and loss account of
Transferor Company should be aggregated with the corresponding balance of Transferee
Company or transferred to the general reserve, if any.
(iv)
Difference between the purchase
consideration and the amount of share capital of the transferor company should
be adjusted in general reserve.
(v)
Accounting policies must be made uniform if
any conflict exist.
Purchase Method
(i)
Under amalgamation in the nature of
purchase, the transferee company takes over the assets and liabilities of
Transferor Company on selection basis.
(ii)
In addition to the power of selection, the
assets and liabilities of vendor company are taken over by purchasing company
at agreed value.
(iii)
Statutory reserve: A reserve created under any law in known as statutory reserve.
Ex. Export Profit Reserve,
Development Rebate Reserve, Investment Allowance Reserve, Profit Export
Reserve, Tea Development Reserve and Foreign Project Reserve etc .
These reserves are created by
the company to take tax benefit. Thus it is necessary to carry forward any such
reserve in the books of the transferee company. It is done by making following
entry:
Amalgamation Adjustment A/c Dr.
To
Particular Statutory Reserve A/c
Amalgamation adjustment
account will be shown as fictitious asset in the balance sheet of the
transferee company under the heading of miscellaneous expenditure.
The particular statutory
reserve should be shown separately under the heading of Reserve and Surplus in
the balance sheet of Transferee company.
When the statutory reserve
is no longer required to be maintained, then both the statutory reserve and
amalgamation adjustment account should be cancelled by means of a revere entry
which is as follow:
Particular Statutory Reserve A/c Dr .
To
Amalgamation Adjustment A/c
(iv)
The balance of the profit and loss account of the transferor company
whether debit or credit loses its identity.
(v)
The difference between purchase consideration and the net assets of the
transferor company will be recognized as follows:
P.C,> Net Assets =
Goodwill
P.C.< Net Assets =
Capital Reserve.
If the difference is known
as Goodwill then it should be amortized to income on a systematic basis over
its useful life. The amortization period should not exceed 5 years unless a
longer period is justified.
Purchase Consideration
As per AS- 14 purchase
consideration is the amount which is paid by the purchasing company (transferee
Co.) to the liquidator of the vendor Company (Transferor CO.) only for its
equity and Preference shareholders. It does not include any payment payable to
creditors and debenture holders etc.
Following methods are used to calculate P.C.
1. Net
Assets Method
2. Net
Payment Method
3. Intrinsic
Method
4. Lump
Sum Method
Net Assets Method
Under this method P.C. is calculated as follow
Agreed Value of Assets Taken
Over ****
Less: Agreed
Value of Liabilities Taken Over ****
Purchase
Consideration (Net Assets) ****
Points to be considered
(i)
If nothing is specified in the question then
book value of assets and liabilities given in the balance sheet will be taken
as agreed value.
(ii)
Only real assets are taken over not the
fictitious asset (like miscellaneous expenses, Profit and Loss Dr. etc.).
(iii)
Only outside liabilities are taken like
debentures, creditors, bill payables etc. The agreed value for these
liabilities is the value at which purchasing company has agreed to pay or
settle with them.
(iv)
Purchase consideration will be discharged by
issue of shares and payments in cash.
Net Payment Method
This method is also called “total payment method”. Under
this method payment to shareholders will be purchase consideration which is
calculated as follow:
Cash
paid ****
Equity
share ****
Preference
share ****
Other
assets ****
P.C. ****
Intrinsic Value Method
Intrinsic value of share means
the value of share on the basis of net assets of the company. This method is
also called “share exchange method”. In this the purchasing company takes over
the business of vendor company on the basis of ratio in which shares of
purchasing company are to be exchanged for the share of Vendor Company. This
ratio is called exchange ratio or swap ratio.
Intrinsic Value
Per Share = Net Assets/No. of shares
Lump-Sum Method
