Advanced Corporate Accounting

Introduction, Meaning & Definition, Advantages and disadvantages, Methods of Purchase Consideration

1. ADVANCED CORPORATE ACCOUNTING Presented By Dr. K. Punitha Devi Head & Asst. Prof. Department of Commerce (CA) Bon Secours College for Women, Thanjvaur

2. Amalgamation , Absorption, External Reconstruction and Internal Reconstruction Amalgamation Introduction: Sometimes companies carrying on similar business combine with each other to obtain the economies of large scale production or to avoid the disastrous results of cut throat competition. It is being done by Amalgamation and Absorption. Amalgamation: When two or more existing companies combine together to form a new company, it is amalgamation. All the combining companies are liquidated. A new company is floated to take over their business.

3. Transferor company and Transferee company Transferor company: The company which is amalgamated into another company is called the transferor company Transferee company: One new company is formed to take over the business of transferor companies is called transferee company. Features of Amalgamation: For amalgamation two or more companies are required to amalgamate or merge themselves. All the existing companies which are merged are to be liquidated . A new company is formed to take over the business of the companies which are to be merged. The value of the new company formed is expected to be greater than the total of the independent values of the amalgamating companies because of economies of large scale production.

4. Types of Amalgamation: From the accounting point of view there are two types of amalgamation. {I} Amalgamation in the nature of Merger and {II} Amalgamation in the nature of Purchase . Amalgamation in the nature of merger: Amalgamation in the nature of merger is an amalgamation which satisfies all the following conditions of Accounting Standard 14 . All the assets and liabilities of the transferor company become the assets and liabilities of the transferee company after amalgamation. Shareholders’ holding not less than 90% of the face value of the equity shares of the transferor company become equity shareholders of the transferee company by virtue of the amalgamation.

5. The consideration to the shareholders of the transferor company is discharged by the transferee company wholly by the issue of equity shares in the transferee company, except that cash may be paid in respect of any fractional shares. The business of the transferee company is intended to be carried on after amalgamation by the transferee company. No adjustment is intended to be made to the book values of the assets and liabilities of the transferor company when they are incorporated in the financial statements of the transferee company exdpt to ensure uniformity of accounting policies . Amalgamation in the nature of purchase: Amalgamation in the nature of purchase is an amalgamation which does not satisfy any one or more of the conditions specified for amalgamation by merger. Even if any one of the five conditions specified is not satisfied, the amalgamation is said to be in the nature of purchase.

6. Accounting Methods and As-14 : Accounting entries are same in the books of transferor company in all types of amalgamation . Accounting entries vary in the books of transferee company according to the nature of amalgamation. According to AS-14, there are two methods of accounting. They are (i) Pooling of Interest Method and (ii) Purchase Method When amalgamation is in the nature merger, the accounting method followed is Pooling of Interest Method. When amalgamation is in the Nature of Purchase, the accounting method followed in Purchase Method.

7. Purchase Consideration: Purchase consideration is the price paid by the transferee company to the transferor company for the purchase of its business. Purchase consideration may be in any one or more of the following forms: They are : Equity shares of the transferee company Preference shares of the transferee company Debentures or Bonds issued by the transferee company Any other securities or assets Cash In the case of amalgamation in the nature of merger, the purchase consideration should be in the form of equity shares issued by the transferee company. Only in the case of amalgamation in the nature of purchase the purchase consideration may take any of the forms stated above.

8. Purchase consideration includes only payment made to the shareholders of the transferor company. Payment made by the transferee company to the debenture holders or creditors of the transferor company should not be included in the amount of purchase consideration . Methods of Purchase Consideration Lumpsum Method Net Assets Method Net Payment Method Intrinsic Value Method i) Lump sum Method : It is a method of presentation of purchase consideration in which the purchase price is given in total. For instance, if A ltd. Takes over the business of B ltd. For Rs.5,00,000 payable Rs.2,00,000 in equity shares, Rs.2,00,000 in debentures and balance in cash, it is the lump sum method of presenting the purchase price.

9. ii) Net Assets Method: Here the different assets taken over by purchasing company at agreed values are added up. From this toal liabilities taken over are subtracted. The balance is ‘Net Assets’. The net assets is the purchase consideration which may be paid in cash or shares or debentures, as per agreement. If nothing is mentioned the book values of assets & liabilities are to be taken. Points to remember in respect of Assets: All fictitious assets such as profit and loss A/c debit balance, Advertisement suspense, Discount on issue of shares and debentures, Preliminary expenses, Underwriting Commission etc. should not be taken in to consideration. Prepaid expenses are to be taken in to consideration. Goodwill (after revaluation), Patent & trade mark (having market value) are to be taken into consideration The expression ‘all assets’ includes cash in hand and at bank.

10. 5. Unless otherwise stated, cash in hand and at bank are to be treated as assets taken over. 6. If any particular asset is not taken over by the new company, the same should not be considered for calculating purchase consideration. Points to remember in respect of liabilities: The expression ‘liabilities’ does not include Accumulated profits, Reserve fund, Dividend equalization fund, Investment allowances reserve, Share premium, Capital redemption reserve etc. The expression ‘Trade Liabilities’ includes only Sundry creditors and Bills payable but does not include other liabilities, to third pary . Eg . Out standing salary, Rent, Bank overdraft etc. 3. The expression ‘the business’ will always mean assets as well as liabilities to third parties. 4. If any particular liability is not taken over by the Co. the same should not be considered.

11. 5. Any fund or a part of the fund which represents liability to third parties must be treated as liabilities. Ex. Employees P.F. and Pension Fund, Workmen's Compensation Fund (to the extent of claim if any) etc. iii) Net Payment Method: Here all the payment agreed upon by the purchasing company are added up. Under this method purchase consideration is calculated by adding the various payments made by purchasing company in the form of cash, shares, debentures etc. No deduction is made for any liability assumed by the purchasing company. This method is called net payment method because the purchase consideration under the method is th e total of payment made even after assuming the liabilities. Points to be remembered: Total up all payments made by the purchasing co. in different forms. Any payment made by the purchasing co. direct to creditors or debenture holders should not be added.

12. 3. Liabilities, if any taken over by the purchasing co. are neither added nor deducted in computing purchase consideration. 4. If th e liquidation expense of the amalgamating companies are paid by the new co. the same should be taken in to consideration for calculating purchases consideration. iv) Intrinsic Value Method Under this method , purchase consideration is calculated on the basis of the intrinsic value of the shares of the vendor company as well as the purchasing company. This is almost like net assets method. However, based on net assets, intrinsic values of the shares of selling and purchasing companies are determined. On this basis the ratio of exchange for shares is found out. This method is more useful when the selling and purchasing companies have shares in each other. Procedure: Find out the intrinsic value of the shares of both the companies. Put the two values as a ratio and on the basis of that ratio determine the no. of share to be issued; the total value of the no. of share will give the purchase consideration.

13. v) If vendor company holds certain shares: If the vendor company already holds certain number of shares in the purchasing company the purchase consideration will be deducted from the shares to be issued by the purchasing company. vi) If purchasing co. holds certain shares: If the purchasing company already holds certain shares in the vendor company calculations should be made as if only other share holders are involved.

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