Accounting for amalgamation of Companies
Posted Date: 01-Jul-2012
This article explains how the accounting in case of amalgamation of companies is done.It depends upon the management of the enterprise t follow correct accounting policies and also management is responsible for the true and fair presentation of financial statements. Hence management should know the accounting in case of different circumstances.
Accounting for Amalgamation
What is Amalgamation & absorption?
Understanding common difference between amalgamation and absorption is necessary before moving toward its accounting part
In this case two companies get liquidated and one new company forms and it acquires the liquidated companies business.
For Instance, Two companies X and Y gets liquidated and there is formation of say company Z, and company Z acquires the two businesses of X and Y.
In this case X and Y is a selling companies (also known as Vendor or Transferor Companies) and Z is called as purchasing company (also called as Transferee Company).
Absorption represents taking over of two or more companies by an existing Company.
For Instance, Suppose X and Y are taken over by already existing Company Say Company Z. here, X & Y are Transferor and Z becomes Transferee co.
Two Recognized methods of amalgamation
As my Topic deals with Amalgamation , now I will explain about two recognized methods of amalgamation recognized by the accounting
1. Amalgamation , where the
nature is of merger( Merging)
Transfer of assets and liabilities and also interest of shareholders and of the business of these companies.
2. Amalgamation, where the
nature is of purchase
There may not be transfer of all assets and liabilities and interest of the shareholders and of the business might not be the same as that of liquidated company.
Indian Accounting standard (AS) 14
that deals with merger accounting. As 14 is only applicable in case of accounting for transferee co
UK – financial Reporting standard 6
also deals with the merger.
Five Golden Criterion's of AS 14
After fulfillment of all of the below cafeterias accounting is said to be of the nature of merger. If any of the below criteria is not followed then accounting is said to be of the nature of purchase.
1. Assets and Liabilities criteria
All the Assets and liabilities of the selling Company become assets and liabilities of the purchasing company.
2.Holding 90% or more shares criteria
Shareholding of the transferor company holding at least 90% of the face value of the equity shares should become shareholders of the purchasing company because of amalgamation. But this should not count shares already held pre- amalgamation by
a) Transferor company in the transferee company.
b) One or more subsidiaries of the transferee co in a transferor co.
c) Nominees of the purchasing co in the selling co.
3. Consideration criteria
The consideration paid to the equity shareholders of the selling co in following forms:
a) The form of equity shares
b) For fractional shares, cash may be paid.
4. Continuation of business criteria
The business of the selling co should be carried on post amalgamation by the
5. Book values criteria
The transferee co. should incorporate assets and liabilities at the book values in its financial statements.
Methods of Accounting
There are two methods used to record amalgamation. Pooling of interest method and purchase method. If the nature of amalgamation is merger than pooling of interest method is used whereas if the nature of amalgamation is purchase then purchase method is used
1. pooling of Interest method.
a)Incorporation of assets, liabilities & reserves( capital/revenue/revaluation reserve)
These are recorded at the same carrying amount and exact as at the date of amalgamation. Profit & Loss account balance if any of the selling co is transferred and aggregated to the corresponding balance of the transferee co or the second option is to transfer it to the general reserve if any
b)If the consideration paid to the selling co is less than the paid up capital
of the selling co, then this difference is transferred to the capital reserve and if the case is vice versa then the difference will be adjusted in capital reserves only and there will be no goodwill incorporation.
c) In case of Conflicting accounting policies
If the accounting policies of the selling co and purchasing co are not matching then uniform set of accounting policies are followed. For this purpose transferee co applies AS 5- that is the effect of changes in accounting policies.
2. Purchase Method
a)Incorporation of assets, liabilities, not reserves.
There are two alternatives available in case of purchase method.
i) Transfer it at the existing carrying amounts
ii) Allocation is done at the individual identifiable assets &
liabilities and basis used is the Fair Market value as per AS 14 ( Fair market value is the arms length price.
b)Non Statutory Reserves
These reserves are ignored in the purchasing companies books and are not carried forward.
c)Difference between purchase consideration and net assets
If positive- Debited to goodwill account, otherwise transferred to capital reserve account.
d)Amortization of goodwill
Goodwill arising on amalgamation will be amortized usually for 5 years, unless there is justification for it amortization for a longer period.
e)how to create statutory reserves in purchasing co books
For incorporating statutory reserves in the books of the selling co , corresponding reserve is given to amalgamation adjustment account , which will be shown under the head, Miscellaneous
Computation of purchase consideration
For computing purchase consideration, generally two methods are used
1) Purchase Consideration using net asset method: Total of asserts taken over and this should be at fair values minus liabilities that are taken over at agreed amounts.
2) Purchase consideration using payments method: Total of consideration paid to both equity and preference shareholders in various forms
Entries that are passed in the transferor co books:
Objective of accounting:
closing transferor co books (reason- sale of the business)
Determination of profit or loss on closing of books of accounts
Entries passed for:
1.Transfer of assets and liabilities of selling co.( at book values and balance sheet values respectively)
2.Due and receipt entry for consideration
3.sale of assets that are not taken over by the purchasing co
4.Settlement of liabilities that are not taken over by the purchasing co
5.Realization expenses if incurred by the transferor co
6.realization expenses if incurred by the transferor co and reimbursed by transferee co.
7.Amount due to equity shareholders
8.transfer of balance to realization account
9.Settlement to shareholders by transfer of consideration received.
Entries that are passed in the transferee co books:
Entries passed under
1.Due entry for business purchase
2.Recording of assets and liabilities taken over
3.Discharge of purchase consideration
4.cancellation of inter co Owing
5.Elimination of unrealized profits
6.realization expenses incurred by purchasing co
7.realization expenses incurred by selling co but the same is reimbursed by the purchasing co
8.Entry for statutory reserve incorporation
Entries passed under
pooling of interest method
All entries passed under purchase method, except 8th entry.
For the purpose of Accounting under any circumstances management is required to know and follow correct accounting policies and use the same in the preparation of financial statements. Amalgamation topic is of immense importance and corporate Management should required to know the accounting part.
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