Chandni Aswal

Assistant Professor

Shaheed Bhagat Singh College

University of Delhi

CORPORATE ACCOUNTINGB.COM(H) SEM-II,SECTION-D

PART-1

What is Amalgamation?

• Means combination or merger.

• In order to eliminate or reduce competition,or to reap economies of scale or to avoidduplication of expenditure on advertisementor to secure a large share of the market two ormore than two joint stock companies maycombine into

What is Amalgamation?....

Two or more companies join to form a new

company

Blending of one or more existing company or

companies with another existing

company

What is Amalgamation?....

• The terms, amalgamation, and reconstructionwere not defined by the Companies Act,1956and the Companies Act,2013.

• The provisions of Chapter XV-”Compromises,Arrangements and Amalgamation of theCompanies Act,2013,facilitate amalgamationand reconstruction of companies.

Accounting standard -14:Accounting for Amalgamation

• The Institute of Chartered Accountants of India hasissued

• The standard has been further revised by the Ministryof Corporate Affairs, Government of India, videNotification dated 30th March,2016,which is relevantfor companies following Companies(AccountingStandards )Rules,2006 and which should be used forpreparation of accounts for accounting periodscommencing on or after the date of notification.

• The standard has been revised for entities other thancompanies in 2016 by the Council of the ICAI and ismandatory for accounting periods commencing on orafter April 1,2017.

Accounting standard -14:Accounting for Amalgamation

• The standard deals with the procedure ofaccounting for amalgamation and thetreatment of resultant goodwill or reserves

Accounting standard -14:Accounting for Amalgamation

According to the standard:(a)Amalgamation means an amalgamation pursuant to the

provisions of the Companies Act,2013 or any other statutewhich may be applicable to companies and includes ‘merger’

(b)Transferor company means the company which isamalgamated into another company, i.e., the company whichis liquidated as per the scheme of amalgamation.

(c)Transferee company means the company into which atransferor company is amalgamated; and

(d) Reserve means the portion of earnings, receipts or othersurplus of an enterprise(whether capital or revenue)appropriated by the management for a general or a specificpurpose other a provision for depreciation or diminution inthe value of assets or for a known liability.

Amalgamation

The combination or merger may take place inany one of the three ways –

1. Amalgamation

2. Absorption

3. External Reconstruction

Lets…

Discuss the example of this…

EXAMPLE OF AMALGAMATION• A new company is formed to purchase or take over the business of 2

or more existing companies.

• For example:-Maruti Motors operating in India and Suzuki based inJapan amalgamated to form a new company called Maruti Suzuki(India) Limited.

AB COMPANY LTD.(NEW AMALGAMATED COMPANY)

EXAMPLE OF ABSORPTION• An existing company takes over the business of another existing company or

other existing companies.

• For example:-

• Note in second example, B & C Company would be wound up and is knownas vendor . A Company is known aspurchasing

TAKES OVER THE

BUSINESS

TAKES OVER THE BUSINESS

EXAMPLE OF EXTERNAL RECONSTRUCTION

• A brand new company is formed to take over the business of onlyone existing company (a sick or loss making).It is a reorganization ofa sick or loss making company or getting rid of shareholders whooppose absorption.

• It involves winding up of one company and formation of onecompany.

• New Company is known as purchasing(or transferee)Company andthe wound up company is called vendor (or transferor)company.

TAKE OVER THE

BUSINESS OF

AMALGAMATION VS.ABSORPTION VS.EXTERNAL RECONSTRUCTION

Type Vendor Company Purchasing Company

Amalgamation Two or more existing companiesTwo or more liquidations

New CompanyFormation of One Company

Absorption One or more existing companiesOne or more liquidations

An existing companyNo formation

External Reconstruction One and only existing company ,generally sick or loss making.One Liquidation

New companyOne formation

AS-14 :AMALGAMTION OF COMPANIES

• The Institute of Chartered Accountants of India(ICAI) hasissued, Accounting Standard(AS)-14 :Accounting forAmalgamation which came into effect in respect of accountingperiods on or after 1-4-1995.

• As per AS-14,for accounting purposes, there are two types ofamalgamation:

Conditions for Amalgamation in the nature of Merger

An Amalgamation is in the nature of merger if following conditions are satisfied:

1. Assets and Liabilities: All the assets and liabilities of the transferor(vendor)

company become the assets and liabilities of the transferee(purchasing

company).

2. Equity Share Capital: Shareholders holding at least 90% or more of the face

value of the equity shares of the vendor (transferor)company become equity

shareholders of the purchasing (transferee )company.

3. Purchase Consideration in equity shares: The purchase consideration due

to (or receivable by)the equity shareholders of the vendor (transferor

company) is discharge by the purchasing (transferee) company wholly by the

issue of equity shares in the purchasing company ,(except that cash may be

paid in respect of fractional shares or payment to dissenting shareholders.

Conditions for Amalgamation in the nature of Merger

4. Business: The business of the vendor company is intended to be carried on by

the purchasing company after amalgamation.

5. Book Values: No adjustment is intended to be made to the book value of

assets(by way of revaluation or otherwise) of the vendor company when they

are incorporated in the financial statements of the purchasing company except

to ensure that the accounting polices are uniform. for example ,if transferor

company is following WDV method of depreciation and the transferee

company is following SLM method of depreciation ,the book value of the

assets of the transferor company will be revised by applying the SLM

method.

Amalgamation in the nature of Purchase

• If any of the conditions applicable toamalgamation in the nature of merger is notsatisfied, then it is the amalgamation is in thenature of purchase.

DIFFERENCE BETWEEN AMALGAMTION IS IN THE NATURE OF MERGER AND PURCHASE

BASIS AMALGAMTION IS IN THE NATURE OF MERGER

AMALGAMTION IS IN THE NATURE OF PURCHASE

1.Assets and liabilities All the assets and liabilities of thetransferor company taken over bythe transferee company resulting ingenuine pooling.

All the assets and liabilities of thetransferor company may not betaken over by the transfereecompany. No genuine pooling.

2.Business Is intended to be carried on. Not be intended to be carried on.

3.Purchase Consideration Issue of equity shares. Howevercash can be paid for fractionalshares.

May be discharged by issue ofequity shares or by cash.

4.Recording of Assets andLiabilities

At their book values(without anyrevaluation)

At their agreed value.

5.Recording of Reserves Reserves are recorded at theirbook value including statutoryreserves.

Only statutory reserves arerecorded.

6.Difference between netassets of vendor companyand purchase consideration

Adjusted in reserves. Either from goodwill or capitalreserve.

Let’s move further with regard to …

PURCHASE

CONSIDERATION

PURCHASE CONSIDERATION• It means the price payable by the transferee company

(purchasing)company to the transferor company fortaking over the business of the transferor(vendor)company.

• Accounting Standard(AS)-14 defines the considerationfor amalgamation as: the aggregate of the shares andother securities issued and the payment made in theform of cash or other assets by the transferee companyto the shareholders of the transferor company.

• It means that payments made by the transfereecompany to or for creditors or debenture holders orany other outside liabilities shall not be included inpurchase consideration.

Lets…

Proceeds further with calculation of purchase consideration…

CALCULATION OR COMPUTATION/METHOD OF PURCHASE CONSIDERATION

I. LUMP-SUM PAYMENT METHOD

II. NET ASSETS METHOD

III. NET PAYMENT METHOD OR TOTAL PAYMENT METHOD

IV. EXCHANGE METHOD OR SWAP RATIO METHOD

LUMP-SUM PAYMENT METHOD

• In this method amount of purchase consideration is given.

• There is no need for calculation.

• For example; A Ltd.takes over the business of B Ltd. for Rs.10 lakhs.

NET ASSETS METHOD

• Purchase consideration is arrived at by adding theagreed (or market) values of the assets takenover by the transferee (purchasing) company anddeducting there from the agreed value of theliabilities taken over by the transferee(purchasing) company.

• It is calculated as

Assets taken over (Agreed Value) XXX

Less: Liabilities taken over (Agreed Value) XXX

Purchase Consideration XXX

NET ASSETS METHOD…

Points to be noted:

1.Fictitious assets such as miscellaneousexpenditures not written off or loss ornegative surplus are not to be considered.

2.The number of shares to be issued will becalculated as under:

=amount of purchase consideration to bedischarged by issue of shares

Issue of shares

Lets…

Understand with the help of question…

QUSETION ON NET ASSETS METHOD

SOLUTION:NET ASSETS METHOD

Assets taken over as per Balance Sheet Values

Plant and Machinery 10,00,000

Furniture 5,00,000

Stock 20,00,000

Sundry Debtors 15,00,000

Cash and Bank 3,00,000

53,00,000

Less: Sundry Liabilities taken over

12% Debentures 6,00,000

Sundry Creditors 14,00,000

Other Liabilities 10,00,000

Consideration for Amalgamation 23,00,000

NET PAYMENT METHOD OR TOTAL PAYMENT METHOD

• Purchase consideration is calculated by adding up the total amount(money value) of equity shares, preference shares and cash receivedfrom the transferee (purchasing) company for the shareholders(equityand preference) of the transferor (vendor )company.

• It is calculated as:Amount of preference shares xxx( i.e;no of shares x issue price)Cash for preference shareholders xxxAmount of equity shares xxx( i.e;no of shares x issue price)Cash for equity shareholders(for fractional shares) xxxPurchase consideration xxx

Point to be noted here-payment made to debenture holders and otherforms of liabilities are not included.

Lets…

Understand with the help of question…

QUESTION ON TOTAL PAYMENT METHOD

A ltd. agreed to takeover the business of B ltd.Theconsideration for this is taking over of tradeliabilities Rs.2,00,000;the payment of cost ofliquidation Rs.15,000;discharge of debentures ofRs.5,00,000 at a premium of 10 % by issue of 12%Debentures in A ltd.,payment of Rs.5 per share incash and issue of 2 fully paid Rs.10 shares atRs.40 per share for every equity shares in Bltd.The share capital of B ltd. consist of 1,00,000equity shares of Rs.10 each fully paid up.Calculate purchase consideration.

SOLUTION:

Payment to equity shareholders

Cash ( 1,00,000 x 5 ) 5,00,000

Equity shares in A ltd.

( 1,00,000 x 2 x 40) 80,00,000

Purchase consideration 85,00,000

EXCHANGE METHOD OR SWAP RATIO METHOD

• It is based on intrinsic values of eachcompany’s shares.

• Intrinsic values means the value of sharesbased on net assets of the company.

Lets…

Understand with the help of Example…

EXCHANGE METHOD OR SWAP RATIO METHOD

A LTD.(PURCHASINGCOMPANY)

B LTD.(VENDOR COMPANY)

(a) Net Assets 55,00,000 82,50,000

(b)No. of equity shares 1,00,000 75,0000

(c) Intrinsic value per share(a/b) 55 110

(d)Share Exchange Ratio or SWAP Ratio 1 2

Thus, the share exchange ratio or Swap Ratio forshareholders of B ltd. is 1:2 i.e., for every 1 share in B ltd..,their shareholders will get 2 shares in A ltd.

THANK YOU VERY MUCH