Amalgamation module i

TYBCOM SEM VI

1. AMALGAMATION OF COMPANIES prepared by Department of Accountancy NKTT College, Thane

2. INTRODUCTION Amalgamation  is the combination of one or more  companies  into a new entity. An amalgamation  is distinct from a merger because neither of the combining companies  survives as a legal entity; a completely new entity is formed to house the combined assets and liabilities of both  companies . Company may combine is in following ways:- Amalgamation Absorption External Reconstruction Amalgamation : In amalgamation a new company is formed to take business of two or more old companies. For example, if the ABC limited and DEF limited are taken over by new company XYZ limited, it is called amalgamation. The old companies taken over are know as the “vendor companies”, and the new company which takes over is known as the "purchasing company”.

3. Absorption :- When an existing company takes over business of another company by discharge of purchase consideration. The old company is known as Vendor Company. Existing company is called as Purchasing Company. 3. External reconstruction:- In external reconstruction, a new company is formed to take over the business of an existing company. For example, if the business of A ltd, a loss-making company is taken over by a new company ABC ltd, it is called external reconstruction. The old company which is taken over is known as the “Vendor Company”; and the new company which takes over is known as the “purchasing company ”.

4. AMALGAMATION VS. ABSORPTION VS. EXTERNAL RECONSTRUCTION Type Vendor company Purchasing company Amal gamation Two or more existing companies Two or more liquidations New company One formation Absorption One or more existing companies One or more liquidations An existing company No formation External Reconstruction One and only one existing company One liquidations New company One formation

5. OBJECTIVES OF AMALGAMATION The main objective of amalgamation is to achieve synergetic benefits which arise, when two companies can achieve more in combination than when they are individual entities. The other objectives of amalgamation are: (i) to changes in economies of scale (ii) to eliminate competition (iii) to build up goodwill (iv) to reduce the degree of risk through diversification (v) Managerial effectiveness.

6. PROCEDURE OF AMALGAMATION The following procedure is followed in an amalgamation: 1. The terms of amalgamation are finalized by the board of directors of the constituent companies. 2. A scheme of amalgamation is prepared and submitted for approval to the respective High Court. 3. Approval of the shareholders of the constituent companies is obtained. 4. Approval of SEBI is obtained. 5. A new company is formed (where necessary) and issues shares to the shareholders of the transferor company. 6. The transferor company is liquidated and all assets and liabilities are taken over by the transferee company.

7. For accounting purposes, AS-14 has categorized amalgamation into two: Amalgamation in the 1. Amalgamation in the Nature of Merger: An amalgamation is considered as ‘Amalgamation in the Nature of Merger’ if all the following five conditions are satisfied: Types of Amalgamation 1. Nature of Merger 2. Nature of Purchase

8. 1. All the assets and liabilities of the transferor company become the assets and liabilities of the transferee company after amalgamation. 2. Shareholders holding not less than 90% of the face value of the equity shares of the transferor company (other than the equity shares already held therein, immediately before amalgamation, by the transferee company or its subsidiaries or their nominees) become equity shareholders of the transferee company by virtue of amalgamation. 3. The consideration to the shareholders of the transferor company (who agree to become equity shareholders of the transferee company) is discharged by the transferee company wholly by issue of equity shares in the transferee company except that cash may be paid in respect of any fractional shares.

9. 2. Amalgamation in the Nature of Purchase: An amalgamation is in the ‘Nature of Purchase’ if any one or more of the five conditions specified for Merger is not satisfied. In such kind of amalgamation shareholders of the company which is acquired normally do not continue to have a proportionate share in the equity of the combined company. The transferee company may also not intend to continue the business of Transferor Company. 4. The business of the transferor company is intended to be carried on, after the amalgamation, by the transferee company. 5. 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 except to ensure uniformity of accounting policies.

10. Accounting for Amalgamation: Accounting Standard AS-14 ‘Accounting For Amalgamation’ Issued By The Institute Of Chartered Accountants Of India States The Procedure For Accounting For Amalgamation. As-14 Uses And Defines The Various Terms As Under: (A) Amalgamation Means An Amalgamation Pursuant to The Provisions Of The Companies Act, 2013 Or Any Other Statute Which May Be Applicable to Companies. (B) Transferor Company Means The Company Which Is Amalgamated Into Another Company. (c) Transferee Company means the company into which a transferor company is amalgamated.

11. (C) Reserve Means Portion of Earnings, Receipts or Other Surplus of An Enterprise (Whether Capital or Revenue) Appropriated By The Management For A General or A Specific Purpose Other Than A Provision For Depreciation or Diminution In The Value of Assets or For Known Liability. (D) Consideration For The Amalgamation Means The Aggregate of The Shares and Other Securities Issued And The Payment Made In The Form of Cash or Other Assets By The Transferee Company to the Shareholders of t he Transferor Company .

12. WHAT IS PURCHASE CONSIDERATION? Purchase consideration is the amount which is paid by the purchasing company for the purchase of the business of the vendor company. PC= Total Assets-External Liabilities In other words consideration for amalgamation means “aggregate of the shares and other securities issued and payment made in the form of cash or other assets by the purchasing (transferee) company to the shareholders of the vendor (transferor) company”. It should not include the amount of liabilities taken over by the purchasing company, which will be paid directly by this company.

13. Methods of Computation Of Purchase Consideration Net Assets Method Lump-Sum Method Intrinsic Worth Method Net Payment Method

14. 1. Lump Sum Method :- When the transferee (Purchasing) company agrees to pay a fixed sum to the transferor company, it is called a lump sum payment of purchase consideration. For example, if X Ltd. purchases the business of Y Ltd. and agrees to pay Rs. 25,00,000 in all, it is an example of lump sum payment. 2. Net Worth (or Net Assets) Method : As per this method, the purchase consideration is calculated by ascertaining the “Net Worth” of the assets taken over by the Transferee (Purchaser) company. The net worth is the Amount Net Asset computed as adding the agreed value of assets taken over by the transferee (Purchaser) company less agreed value of liabilities to be assumed by the transferee (Purchaser) company.

15. Computation of Purchase Consideration as per Net Asset Method

16. 3. Net Payments Method: Under this method, the purchase consideration will be the total of payments made by purchasing company to security holders (only shareholders) of Vendor Company, on any basis in any form. Payment to Debentures holder is not considered as Purchase Consideration. Computation of Purchase Consideration as per Net Asset Method:-

17. 4. Intrinsic value or share exchange method:   In this method to Calculate Purchase Consideration Following Method is Used: a. Total asset taken over at their agreed values B. Less: Total liabilities taken over at their agreed amounts C. Net Assets Intrinsic Value per share = Net Asset Available to the Equity Shareholders/ Number of Equity Shares.

18. ENTRIES IN THE BOOKS OF VENDOR COMPANY NO. TRANSACTION /ENTRY AMOUNT A. CLOSING ASSETS & LIABILITIES ACCOUNTS (1) Assets transferred Realization a/c Dr (total of assets) To various assets accounts (balances as per B/S) (2) Liabilities transferred Various outside liabilities accounts Dr (balance as per B/S) To Realization a/c (total) B. REALISATION OF ASSETS AND PAYMENT OF LIABILITIES (3) Purchases consideration due purchasing company’s a/c Dr To Realization a/c (4) Sale of assets not taken over bank a/c Dr To Realization a/c (5) Payment of a liabilities not taken over Realization a/c Dr To bank a/c

19. C. SETTLEMENT OF CATIPAL ACCOUNTS (6) Amount due to preference shareholders Preference share capital a/c Dr To pref. shareholders a/c (7) Profit on realisation Realisation a/c Dr To equity shareholders a/c (8)Loss of realisation E quity shareholders a/c Dr To Realisation a/c (9)Transfer equity share capital Equity share capital a/c Dr To equity shareholders a/c (10)Accumulated losses E quity shareholders a/ Dr To profit & loss a/c To Deferred Revenue Exp. a/c (11) Accumulated profits / reserves Profit & loss a/c Dr General reserve a/c To equity shareholders a/c

20. BALANCE SHEET (Amalgamated) Particulars Amount EQUITY AND LIABILITIES (1) Shareholders funds a. Share capital XXX b. Reserves and surplus XXX c. Money received against share warrants XXX (2) share application money pending allotment XXX (3) non current liabilities a. Long term borrowings XXX b. Deferred tax liabilities XXX c. Other long term liabilities XXX d. Long term provisions XXX

21. (4) Current liabilities a. Short term borrowings XXX b. Trad e payables XXX c. Other current liabilities XXX d. Short term provision XXX Total XXXX 2. ASSETES (1) Non current assets a. Fixed assets XXX -tangible assets XXX -intangible assets XXX -capital work in progress XXX -intangible assets under development XXX b. Non current investment XXX c. Deferred tax assets XXX

22. d. Long term loans and advances XXX e. Other Non current assets XXX 2. Current assets a. Current investment XXX b. Inventories XXX c. Trad e receivable XXX d. Cash and Cash equivalent XXX e. Short term loans and advances XXX f. Other current assets XXX Total XXXX

23. Notes to Accounts Share Capital-1 Authorised Capital Equity Share capital No. of shares per share price Preference Share capital Issued Capital, Subscribed Capital and Paid up Capital Equity Share capital No. of shares per share price Preference Share capital

24. Reserve and Surplus General Reserve Capital Redemption Reserve Capital Reserve Debentures Redemption Reserve Security Premium Other Reserve Profit and Loss (Surplus)