Amalgamation, absorption and purchase consideration

This presentation contain information regarding amalgamation, absorption, types of amalgamation, purchase consideration and different methods of calculating purchase consideration.

1. Mr. Bijin Philip Assistant Professor Department of Management Kristu Jayanti College Corporate Accounting Unit – III Amalgamation and Absorption

2. Amalgamation The term “Amalgam” means to unite or to combine . The Team “amalgamation” means when two or more existing companies go into liquidation and a new company is formed to take over their business. A Ltd B Ltd AB Ltd Ex: Hero + Honda = HeroHonda Maruti Motors (India) + Suzuki (Japan) = Maruti Suzuki

3. Absorption The Team “absorption” means when one or more existing companies go into liquidation and one existing company take over or purchase the business of all companies. In the case of absorption, only one company 'survive' and all other lose their identity. A Ltd B Ltd B Ltd Ex: Hutch + Vodafone = Vodafone Myntra + Flipkart = Flipkart

4. Difference B/W Amalgamation & Absorption Comparison Amalgamation Absorption Meaning 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. New entity The new entity is formed. No new entity is formed. Minimum number of companies involved In the process of amalgamation, there are at least three companies involved (two liquidating and one newly formed). While in Absorption there are at least two companies involved. Liquidating companies At least two companies liquidate. Only one company is liquidated (whose business is overtaken by the other). Domination No company dominates any other company. The bigger company dominates the weaker company.

5. Transferor Company: It means the Company, which is amalgamated into another Company. Transferee Company: It means the Company into which a Transferor Company is amalgamated. Important Terms

6. Types of Amalgamation

7. Purchase consideration is the agreed amount which transferee company (Purchasing company) pays to the transferor company (Vendor company) in exchange of the ownership of the transferor company. It may be in form of cash, shares or any other assets as agreed between both the companies. Purchase Consideration

8. In this method when Transferee Company agrees to pay Transferor Company a fixed sum of money. Ex: xyz limited agrees to pay abc ltd 25 lakh. This is lump sum method. 1. Lump sum method

9. I n this method purchase consideration is calculated by adding all the payments made by the transferee company to the shareholders of the transferor company. Payment can be in the form of cash, shares or debentures . Note: V alue of assets and liabilities taken over by the transferee company are not to be consider Liquidation expenses paid by the transferee company should not consider Amount paid to third party by the transferee company should not consider 2 . Net Payment Method

10. U nder this method the net asset value is calculated by deducting all the liabilities taken over by the transferee company from the entire asset taken by the transferee company.  3 . Net Asset Method PC = Asset taken over – Liability taken over

11. I n this method to calculate purchase consideration following formula is used: PC = Net asset available to the equity shareholders/ number of equity shares. 4. Intrinsic value or share exchange method