122831 48877 Notes on Amalgamation

8/16/2019 122831 48877 Notes on Amalgamation

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NOTES ON AMALGAMATION, ABSORPTION

& EXTERNAL RECONSTRUCTION FOR CA

FINAL FINANCIAL REPORTING.(CONCEPTSOF PC, INTERCOMPANY HOLDING)

……………………………

FIRSTLY, WE WILL KNOW THE MEANINGS OF AMALGAMATION, ABSORPTION

& EXTERNAL RECONSTRUCTION SEPORATELY………………………………………… ALTHOUGH THEIR TREATMENT IS SAME.

MEANING OF AMALGAMATION

WHEN TWO OR MORE OLD COMPANIES COMBINDLY FORM A NEW COMPANY

THAT IS KNOWN AS AMALGAMATION

EXAMPLE: X LTD (OLD) + Y LTD (OLD) !LTD (NEW COMPANY).

MEANING OF ABSORPTION

WHEN ONE OLD COMPANY TAKEO"ER THE ANOTHER

COMPANY………….#.$.……………………………WHEN ONE COMPANY ABSORBSTHE ANOTHER COMPANY IN ITSELF THAT IS KNOWN AS

ABSORPTION……………………

EXAMPLE: % XLTD+YLTD XLTD


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IT MEANS XLTD TAKES O"ER YLTD AND THEN NO NEW COMPANY IS

FORMED AND EXISTENCE OF YLTD IS FINISHED ONLY X LTD PRE"AILS

O"ER THAT IS KNOWN AS ABSORPTION.

MEANING OF EXTERNAL RECONSTRUCTION

WHEN ONE COMPANY CHANGES ITS EXTERNAL STRUCTURE THAN IT IS

KNOWN AS EXTERNAL RECONSTRUCTION.

EXAMPLE: % XLTD YLTD

IN ABO"E EXAMPLE CONPANY HAS CHANGED ITS NAME IE EXTERNALLY IT

HAS CHANGED NOW.

WE HAVE TO STUDY 2 ASPECTS IN THIS CHAPTER

& THESE ARE AS FOLLOWS:

!). CALCULATION OF PURCHASE CONSIDERATION

2) INTER COMPANY HOLDINGS

NOTE:

I AM NOT DISCUSSING BOO"S OF OLD COMPANY #NEW COMPANY……….

1)

1) !) CALCULATION OF PURCHASE CONSIDERATION

THERE ARE TWO METHODS FOR COMPOUTING PURCHASE

CONSIDERATION:

NET PAYMENT METHOD


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NET ASSETS METHOD

NET PAYEMENT METHOD

IN THIS METHOD THE PURCHASE CONSIDERATION MEANS AGGREGATION OF

CONSIDERATION PAID TO SHAREHOLDERS(E$UITY & PREFERENCE IN ANY

FORM VI%…SHARES, DEBENTURE, OTHER SECURITIES AND BY WAY OF CASH.

HENCE IT IS CMPOUTED AS UNDER PLEASE NOTE THE PRESENTATION

FRIENDS FOR THE EXAMS:

PURCHASE CONSIDERATION UNDER NET PAYMENT METHOD(PREPARE THE

FOLLOWING STATEMENT.)……………………………….

PAYMENT TO PAYMENT

IN( FORM OF

PAYMENT)

WOR"INGS AMOUNT

!).E$UITY

SHAREHODERS

!).PREFERENCE

SHAREHOLDERS

ANY

ANY

XXXXXXXXXXXX

XXXXXXXXXXXX

XXXXXXXXXXX

XXXXXXXXXXX

EXAMPLES ON NET PAYMENT METHOD………

EXAMPLE !: OLD COMPANY A LTD. TOO" OVER B LTD. BLTD MA"

S THE PAYMENT TO E$UITY SHAREHOLDERSOF NEW COMPANY

IN THEIR SHARES FOR NEW COMPANY'S 2 SHARES…………………….IT

MEANS OLD COMPANY TA"ES THE 2 SHARES OF NEW COMPANY AND GIVES

THEM SHARES. THIS IS SWAP RATIO………


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E$UITY SHARES OF OLD COMPANY ARE: !

PREFRENCE SHARES: 2

VALUE OF NEW COMPANY'S E$UITY SHARE: RS.!2

VALUE OF NEW COMPANY'S PRFERENCE SHARE: RS.!

WE HAVE TO COMPUTE PURCHASE CONSIDERATION BY FOLLOWING THE

FOLL FORMULAE

SWAP RATIO*(E$UITY SHARES#PREFERENCE SHARES OF OLDCOMPANY)*VALUE OF E$UITY#PREFERENCE SHARE OF NEW COMPANY.

ANSWER:-

PAYMENT TO PAYMENT

IN( FORM OF

PAYMENT)

WOR"INGS AMOUNT(RS)

!).E$UITY

SHAREHODERS

OF THE NEW COMPANY.

!).PREFERENCE

SHAREHOLDERS

OF THE NEW

COMPANY

TOTAL PC

E$UITY SHARE

PREFERENCE

SHARES

(#2*!)*!2

(¼*50000)*18

!

22+

22+#

LOT BASED FRACTIONS


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IN PCC WHEN THERE ARE FRACTIONS IN SWAP RATIO WE USED TO COMPOUTE PC

DIRCTLY WITHOUT ANY LOT BASED FRACTIONS .BUT NOW IN FINAL WE HAE TO

COMPOUTE PC BY LOT BASED FRACTIONS.

FRIENDS! WE WILL UNDERSTAND THIS CONCEPT BY FOLLOWIN" E#AMPLE:-

ASSUME E#AMPLE NO. 1 E#CEPT SWAP RATIO WHICH IS AS FOLLOWS:-

E$UITY SHARE: - 1%:&

PREFERENCE SHARE: - 11:'.

ANSWER:-

PC BY NON LOT BASED METHOD(PCC METHOD)

PAYMENT TO PAYMENT

IN( FORM OF

PAYMENT)

WOR"INGS AMOUNT(RS)

!).E$UITY

SHAREHODERS

OF THE NEW

COMPANY.

!).PREFERENCE

SHAREHOLDERS

OF THE NEW

COMPANY

TOTAL PC

E$UITY SHARE

CASH

PREFERENCE

SHARES

CASH

!#*!-!+

!.2+

.5 WILL BE PAID

IN CASH.

185&1*1

.5*1

11+'*50000

.111 WILL BE

PAID IN CASH.

,1111*18

.111*18

222+/

!0000

2

2+!


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THE ABOE METHOD WAS THE NON LOT BASED METHOD .BUT

LOT BASED METHOD MEANS THAT WE HAE TO FIND A NUMBER OF E$UITY

SHARES BY WHICH IS DIISIBLE WITHOUT ANY DECIMAL+FRACTIONS WITH SWAP

RATIO "IEN..AND CASH IS ALSO "IEN FOR BALANCE E$UITY

SHARES IN SWAP RATIOIT WILL BE CRYSTAL CLEAR BY FOLLOWIN"

ACTION..

IN ABOE E#AMPLE I WILL SHOW ONLY FOR E$UITY SHARES AND DO FOR

PREFERENCE SHARES YOURSELF

LIE FOR E$UITY SHARES

PAYMENT IN E$UITY SHARES:-100000*1%+&185&1.85 IN THIS CASE 185&1 WE

HAE TO COMPUTE MULTIPLE OF &../FOR SHARE OF NEW COMPANY

BECAUSE WE ARE MAIN" PAYMENT TO NEW CO SHAREHOLDERS IN

LOTS..SO THAT MUST BE DIISIBLE BY THEIR SHARESO! ALUE

WILL BE AS.(''''5*1%+&)*1 8,0 IN E$UITY SHARES IN CASH

(5*1%+&)*1111.

TREATMENT OF FRACTIONS

1) WHENE"ER SWAP RATIO IS GI"EN THEN

A)IDENTIFY EEN ODD NO. OF SHARES ACCORDIN" TO SWAP RATIO

B) CALCULATED SHARES TO BE ISSUED TO EEN SHAREHOLDERS

C) CALCULATE E$IALENT CASH A"AINST SHARE FOR ODD LOT

) IF SWAP RATIO IS MISSING, CALCULATE SWAP RATIO

BY FOLLLOWING METHOD

ALUE OF OLD COMPANY+ ALUE OF NEW COMPANY

THESE ALUES ARE THOSE ALUES WHICH ARE A"REED AMON" OLD NEW COMPANIES.EITHER "IEN IN $UESTION IF NOT

"IEN THEN WE HAE TO COMPOUTE INTRINSIC ALUE AS PER ALUATION

CHAPTER BUT WE HAE TO FOLLOW FOLLOWIN" ONLY:-

1) USE SIMPLE AERA"E IN FMP

) USE CLOSIN" CAPITAL EMPLOYED

%) I"NORE REAUATION OF CURRENT ASSETS CHAN"E IN ACCOUNTIN"

POLICIES..


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NOW WHY WE TAE:- ALUE OF OLD COMPANY+ ALUE OF OLD COMPANY.

REASON:- SUPPOSE ALUE OF OLD COMPANY SHARES IS RS %0+- NEW

COMPANY IS RS.0+-

HENCE NEW COMPANY SHOULD ISSUE SUFFICIENT NUMBERS SO THAT NEITHER

PARTY LOOSES

ALUEOF OLD CO:- %0*1 ALUE OF NW COMPANY :-0*1.5(IE.%0+0)

ABOE ANALYSIS MEANS NEW COMPANY OF WILL ISSUE 1.5 SHARE FOR

EERY 1 SHARE OF OLD COMPANY.

INTER COMPANY HOLDING

WHENEVER ANY COMPANY WHICH ARE BEING AMALGAMATED TOFORM A NEW COMPANY, HOLD SHARES AMONG THEMSELVES , IT ISCALLED INTERCOMPANY HOLDING .

1) EFFECTS ON PURCHASE CONSIDERATION

PURCHASE CONSIDERATION IS CALCULATED FOR ALL SHAREHOLDERS

OF OLD COMPANY. IF OLD COMPANY HOLDS SHARES IN NEW

COMPANY, SUCH SHARES ARE DEDUCTED WHILE CALCULATINGPC.

PC = (SWAP RATIOALOF NEW SHARES OF OLD COMPANY)%SHARE OFNEW CO HELD BY OLD COMPANY………………………….

DON’T CHECK FRACTIONS……………..

) ‘’PC IS TO BE DISCHARGED’’(D PC) IS ALSO CALCULATED FORPAYMENT PURPOSES. IT REPRESENTS THAT PART OF PC WHICH ISBEING GIVEN TO ETERNAL

SHAREHOLDERS OF OLD COMPANY.

DPC = SWAP RATIO!( ALL SHARES OF OLD COMPANY"SHARES OFOLD COMPANY HELD BY OTHER COMPANY).

EAMPLE#" PLEASE SOLVE THIS BY URSELF………………………….FORPRACTICE


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COMPUTE PC $ DPC.

NO. OF SHARES

HELD IN

OLD COMPANY BYNEW COMPANY

NEW COMPANY BY OLDCOMPANY

SWAP RATIO

OLD COMPANY %&&&&

'&&&

#'

NEW COMPANY

&&&

VALUE OF NEWCO(ENTRY VALUE)= *'

BY PANKA+ KATHURIA(CA.INTER)(CONTACT NO.&'-''')………………………………………………………………..I

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122831 48877 Notes on Amalgamation