Amalgamation

Amalgamation (AS14)

Amalgamation is the process in which two companies are merged/amalgamated into one company. Amalgamation may also be understood as the process in which two companies are liquidated to form a new company.

In Amalgamation – 2 Companies are liquidated and 1 New Company is formed.

The term amalgamation is to be understood in a wider sense as it includes Absorption also.

Absorption is the process in which one company takes over the running business of another company.

In Absorption – 1 Company is liquidated and no New Company is formed.

Amalgamation is a kind of a Reconstitution/ Reconstruction of the company. The company may also undergo the process of External Reconstruction, in which one company is liquidated and another company is formed to take over the business of the liquidated company.

In External Reconstruction – 1 Company is liquidated and 1 New Company is formed.

Definition of Amalgamation

According to AS 14, “Amalgamation means an amalgamation pursuant to the provisions of Companies Act, 2013 or any other statue which may be applicable to companies”.

Another definition of Amalgamation as per the S. Somayajulu V/s Hop Prudhommee and Co. is “state of things under which either two companies are joined so as to form a third entity, or one is absorbed into or blended with another”.

For the purpose of accounting Amalgamations can be further classified into the following two-

1.      Amalgamation in the Nature of Merger.

2.      Amalgamation in the Nature of Purchase.

Amalgamation in the Nature of Merger

An Amalgamation would be considered as Amalgamation in the Nature of Merger only if all the stated conditions are satisfied.

The Conditions are as follows:

a.       All the assets of the transferor company will be taken over by the transferee company.

b.      Atleast 90% of the shareholders (of the face value of Equity Shares) of the transferor company will be the shareholders of Transferee Company after amalgamation.

c.       The total purchase consideration payable to equity shareholders who have agreed to be the shareholders in the transferee company should be paid in equity shares only, Except cash may be paid only for the fraction of the shares.

d.      The transferee company should intend to continue the business of the transferor company after amalgamation.

e.       No adjustments are intended to be made in the book values of the assets and liabilities of the transferee company in the books of transferor company.

Amalgamation in the Nature of Purchase

An Amalgamation would be considered as Amalgamation in the Nature of purchase, when any one or more of the conditions as specified as per Amalgamation in Nature of Merger are not satisfied.

Accounting Treatment for Amalgamation
In the Books of Transferee Company there are 2 methods of maintaining the accounting records of Amalgamation based on the Nature of Amalgamation - “Pooling of Interest Method” is followed in case of Amalgamation in the Nature of Merger and “Purchase Method” is followed in case of Amalgamation in the Nature of Purchase.

Accounting Entries in the Books of Transferor Company:

It is to be noted that the accounting entries in the books of Transferor Company will remain same irrespective of the method of Amalgamation.

The entries and the accounting treatment here is very similar to Dissolution of Partnership. Here also we open a special account known as “Realisation A/c” for transferring various assets and liabilities as in case of Dissolution of Partnership.

Journal Entries in the Books of Transferor Company A/c

1.      For transferring the assets to Realisation Account.

Realisation A/c                        Dr.

     To Various Assets A/c

Note: All the assets (whether taken over or not) should be transferred at their book values. Only fictitious assets are not to be transferred.

If the transferee company does not take over the cash and bank balance, it should not be transferred to realization A/c.

2.      For transferring the Liabilities taken over by the transferee company.

Liabilities A/c                          Dr.

       To Realisation A/c

Note: Only those liabilities taken over by the purchasing company should be transferred to the realization account at their book values. Any reserves and surplus including P & L A/c should not be transferred to Realisation A/c.

3.      For Purchase Consideration Due.

Transferee Company A/c        Dr.

       To Realisation A/c

4.      For Receiving Purchase Consideration

Bank A/c                                 Dr.

Shares in Transferee Co. A/c  Dr.

       To Transferee Company A/c

5.      For sale of Assets not taken over by transferee company

Bank A/c                                 Dr.

       To Realisation A/c

6.      For payment of liabilities not taken over by the transferee company.

Liability A/c                            Dr.

       To Bank A/c

7.      For Realisation Expenses

a)      If the expenses are paid and borne by the transferor company

Realisation A/c                  Dr.

     To Bank A/c

b)      If the expenses are paid by the transferee company

No Entry.

8.      For the transfer of Preference Shares to Preference Shareholders A/c

Preference Share Capital A/c  Dr.

        To Preference Shareholders A/c

Note: For any excess or less payments to the Preference Shareholders the difference is to be transferred to Realisation A/c.

9.      For transfer of Equity to Equity Shareholders A/c

Equity Share Capital A/c        Dr.

Reserves & Surplus A/c          Dr.

        To Equity Shareholders A/c

10.  For Profit on Realisation A/c

Realisation A/c                        Dr.

        To Equity Shareholders A/c

In case of Loss Reverse the above Entry.

11.  For payment to Preference Shareholders

Preference Shareholders A/c   Dr.

                     To Cash/Bank A/c

                     To Shares in Transferee Co. A/c

12.  For payment to Equity Shareholders

Equity Shareholders A/c         Dr.

                     To Cash/Bank A/c

                     To Shares in Transferee Co. A/c

Accounting in the Books of Transferee Company

The accounting process for the amalgamation in the books of the Transferee Company depends on the nature of Amalgamation. As the Transferee Company is purchasing the business it needs to record the acquisition of the assets and the liabilities from the Transferor Company and also how the payment for such acquisition was made.

I.       Pooling of Interest Method:

This method of Accounting is used when the Amalgamation is in Nature of Merger.

Some important points to be remembered in such method are:-

Ø  All the Assets, Liabilities and Reserves of the Transferor Company needs to be recorded in the Transferee Company at their book values.

Ø  The balance in the Profit and Loss A/c of the Transferor Company needs to be adjusted in the General Reserve of the Transferee Company.

Ø  If there is any difference in the amount paid as Purchase Consideration and the Amount of Share Capital of the Transferor Company, then such difference will also be adjusted through the General Reserve A/c of the Transferee Company.

Journal Entries in the Books of Transferee Company

(Pooling of Interest Method)

1.      On Amalgamation

Business Purchase A/c                    Dr.

    To Liquidator of Transferor Company A/c

(This entry is passed with the amount of PC)

2.      For recording of Assets and Liabilities Taken over

Various Assets A/c                         Dr.

     To Liabilities A/c

     To Reserves A/c

     To Business Purchase A/c

(In the above Entry the Assets and Liabilities are recorded at their Book Values and the Business Purchase is recorded at PC, Reserves will show the Balancing Figure.)

3.      For Making Payments

Liquidator of Transferor Company A/c     Dr.

      To Bank A/c

      To Share Capital A/c.

(If shares are issued at a premium then, Share Premium A/c would be Credited)

4.      For Payment of Liquidation Expenses

General Reserve A/c                                   Dr.

       To Bank A/c

(In some book we can also see that rather than General Reserve – Goodwill A/c is Debited)

5.      For Amalgamation Expenses

General Reserve A/c                                   Dr.

        To Bank A/c

Calculation of Amount of General Reserve to be shown in Transferee Companies Balance Sheet

Transferor’s Companies-

Equity Share Capital                                       XXX

Preference Share Capital                                XXX

Reserves and Surplus                                      XXX

Profit & Loss A/c                                              XXX      XXX

Less: Purchase Consideration                                     XXX

                                                                                             XXX

Add: General Reserve of Transferee Co.                    XXX

                                                                                             XXX

Less: Amalgamation Expenses                                    XXX

General Reserve (To be shown in Balance Sheet)      XXX

II.          Purchase Method:

Ø  Any Excess amount paid by the transferee company is to be treated as goodwill and if the amount of PC is less than the net assets then the difference is to be credited to capital Reserve A/c.

Ø  Any Reserves of Transferor company will not be carried forward to the transferee company as it was done in case of Pooling of Interest Method.

Ø  The assets and the liabilities of the Transferor company can be taken over by the Transferee company at its Book Values or at the agreed values.

Journal Entries in the Books of Transferee Company

(Purchase Method)

1.      For the Purchase of Business

Business Purchase A/c                                    Dr.

     To Liquidator of Transferor Co. A/c

2.      For Recording Assets and Liabilities taken over

Various Assets A/c                                         Dr.

     To Liabilities A/c

     To Business Purchase A/c

Note: If the total of Credit side is higher, than the balancing figure on the Debit side would be shown as “To Goodwill A/c; If the total of Debit side is higher, than the balancing figure on the Credit side would be shown as “By Capital Reserve A/c”.

3.      For Payment of Purchase Consideration

Liquidator of Transferor Co. A/c                    Dr.

     To Bank A/c

     To Equity Share Capital A/c

     To Preference Share Capital A/c

     To Security Premium A/c (If Any)

4.      If any liability of Transferor company is paid by Transferee company

Liability A/c                                                    Dr.

     To Bank A/c

     To Equity Share Capital A/c

     To Debentures A/c

5.      If liquidation expenses are paid by transferee company

Goodwill A/c                                                  Dr.

     To Bank A/c

Note: Additional Payment by transferee company in form of liquidation expenses actually increases its Purchase consideration hence Goodwill A/c is reduced.

6.      When Statutory reserve is maintained

Amalgamation Adjustment Reserve A/c        Dr.

     To Statutory Reserve A/c

Note: Usually in case of Purchase Method no reserves of the transferor company is retained by the transferee company, but for statutory reserve it can be taken over. Amalgamation Adjustment Reserve is to be deducted from the Reserves and Surplus in the Balance Sheet of Transferee Company.