Absorption, Amalgamation, Reconstruction, Purchase Consideration

1. Absorption is a form of merger where there is a combination of two or more companies into an 'existing company'.
2. Features - One or more companies are liquidated, Generally, larger company purchase the business of smaller company.
3. Objectives - To have control over the market, To eliminate unnecessary competition, To get benefits of large scale operations.
4. Advantages - Expansion, Faster growth, Increased efficiency.
5. Reconstruction - Internal reconstruction is a method in which the reconstruction is undertaken without winding up the company and forming a new one.
External reconstruction takes place when an existing company goes into liquidation for the express purpose of selling its assets and liabilities.
6. Purchase Consideration - It is price payable by transferee company to transferor company by taking over the business of transferor company.
7. Amalgamation - When two or more different companies join to become one, the process is called Amalgamation.

1. Absorption of Company By - Ayush Mishra Advanced Corporate Accounting

2. What is Absorption? Absorption of Company is a way of business arrangement in which an existing company takes over the business of the another entity. The entity who gets absorbed goes into the liquidation process. The payment for such absorption to the old entity can be made either in cash or in shares or mixture of both. The absorbed company continue to run operations as it was doing before the absorption and staff continue to work under the new management.

3. For example: Company “A” acquires the Company “B”. So that after the acquiring the name of Company “B” will not exist but the name of Company “A” will exist. All the assets and liabilities of old company (B) are transferred to absorbing company (A). Say P ltd. was a market leader in mobile phone manufacturing and R ltd. was a small manufacturer of mobile phones and P ltd. brought the whole business of R ltd., the process is that of Absorption. As there is no new company formed, only R ltd. liquidated and P ltd. acquired the business of R ltd.

4. Features Of Absorption One or more companies are liquidated. No new company is formed. The nature of business of both companies is similar. Generally, larger company purchase the business of smaller company.

5. Objectives To have control over the market. To get benefits of centralization and diversification. To eliminate unnecessary competition. Remove scarcity in capital. To get benefits of large scale operations. Achieve better management effectiveness and get benefits of technology.

6. Advantages Of Absorption Expansion. Faster growth. Increased efficiency. Increased brand value. More resources etc.

7. Meaning of Reconstruction If any company is suffering loss and it close its business and join with or without other company, it creates new company. That is called reconstruction. There are two types of reconstruction. External Reconstruction When a company has no power to operate his own business due to heavy losses and it sells all its business to a new company. It will be called as external reconstruction. Internal Reconstruction Internal Reconstruction means to do every action for bringing the company out of losses. If a company is suffering heavy losses, company can use the provision 94 of Indian Company law 1956 and reduce its capital.

8. Purchase Consideration in Absorption Purchase Consideration(PC) means the aggregate of the shares/other securities issued & payment by way of cash/other assets by the purchasing company to the share holders of vendor company. Lump Sum Amount When party agrees to pay the vendor company, a lump sum amount, then it will be taken as Purchase Consideration. Value of Shares If the purchasing company is buying the vendor company on the basis of the value offered per share. For example, “A” company has 20,000 shares. The company “B” approached “A” and offered Rs. 20 per share which the management has approved and signed the absorption agreement then, Purchase consideration = 20,000 x 20 = Rs. 400,000

9. Methods of Calculation of PC Net Payment Method If the absorption involves payments to shareholders, debenture holders and creditors of the absorbed company. The payment may be in the form of cash, shares and debentures. Net Asset Method If the lump sum payment is not made by the purchasing company, then we have to calculate the net worth of assets taken. Net worth of the asset is calculated as follows: Value of assets as mutually agreed xxx Less: Value of liabilities as mutually agreed ( yyy ) Purchase Consideration zzz

10. Accounting in books of vendor company Balance sheet of vendor company on liquidation date. Ledger accounts Realization Account Cash & bank Account Shareholders Account Shares/debentures in New/purchasing company Account Purchasing Company Account

11. Journal Entries The vendor company needs to close its main accounts like: Realization Account Shareholders Account Purchasing Company Account

12. Journal Entries in the Books of Liquidating (Vendor) Company:

13. Example The balance sheet of Tata Steel Ltd. on 31st Dec, 2011 is as follows: After detailed discussion, it was decided that the Tata Steel Ltd. should be absorbed into JSW Ltd. . In order to complete the process of absorption, JSW Ltd. will issue 4 shares of $100 each for three shares held in the Tata Steel Ltd.. All liabilities and assets were taken over by the JSW Ltd. at the book value. Required: Pass journal entries in the books of A. Tata Steel Ltd., B. JSW Ltd. Total assets $1,000,000 Share capital $100 each) 600,000 Profit & Loss account 240,000 Creditors 160,000

14. Solution Shares in JSW Ltd. (8,000 x 100) $800,000 If 03 old shares, so new shares = 4   If 01 old shares, so new shares = 4/3   If 6,000 old shares, so new shares = 4/3 x 6,000 = 8,000 shares   Description Debit Credit All assets 1,000,000       Capital reserve   40,000     Creditors   160,000 Payable to Tata Steel Ltd.   800,000 Payable to Tata Steel Ltd. 800,000       Share capital   800,000 JSW Ltd. Company Journal Entries

15. Tata Steel Ltd. Company Closing Entries Description Debit Credit Realization account 1,000,000    to All assets   1,000,000  Creditors  1,60,000       to Realization account   1,60,000  Receivable from JSW Ltd.  8,00,000       to Realization account   8,00,000  Shares in JSW Ltd.  8,00,000       to Receivable from JSW Ltd.   8,00,000  Share capital 6,00,000    Profit & Loss account 2,40,000        to Realization account   40,000    to Shareholders   8,00,000  Shareholders 8,00,000        to Shares in JSW Ltd.   8,00,000 

16. Amalgamation versus Absorption Following are the main differences between amalgamation and absorption: Meaning When two or more different companies join to become one, the process is called Amalgamation. When one company takes over the business of another company, the process is called Absorption. Liquidation Two or more companies are liquidated in the process of amalgamation. One or more companies are liquidated in absorption.

17. Size There is no such matter of size of amalgamating companies. Generally, size of purchasing company is greater than that of vendor company in absorption. Formation In amalgamation, a new company is formed to take over the business of vendor companies. In absorption, no new company is formed, only purchasing or absorbing company take over the business of liquidated company.

18. Bibliography http://studymaterial.unipune.ac.in/ http://www.easyaccounting101.com/ https://accountlearning.blogspot.com/ https://keydifferences.com/ http://www.svtuition.org/

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