AMALGAMATION OF COMPANIES, corporate account

Corporate account notes on amalgamation.

1. AMALGAMATION OF COMPANIES ( AS-14) Dr. Shashank Sharma SOB 1

2. Overview Meaning of Amalgamation Nature of Amalgamation Accounting Methods Maintaining the Accounting Books Practical Questions 2

3. Meaning of Amalgamation In amalgamation we have generally two companies called as – Vendor or Transferor Company and Vendee or Transferee Company. Example 1- Company A and Company B amalgamate to form Company C. Company A and B are called transferor companies and Company C is called as the transferee company - this strategy is called as AMALGAMATION . Example 2- Company A is taken over by Company B (purchased). Here, Company A is called as Transferor Company and Company B is Transferee Company. This strategy is called as ABSORPTION . Example 3- Company A has been suffering from losses for past 5 years, a new Company B is floated to take over the existing Company A. Here, Company A is the transferor company and Company B is Transferee Company. This strategy is termed as EXTERNAL RECONSTRUCTION . 3

4. Meaning of Amalgamation Amalgamation refers to the process of merger of two or more companies into a single entity or where one company takes over the other by outright purchase. 4

5. Nature of Amalgamation Amalgamation in the nature of purchase : If any one or more of the aforementioned conditions are not satisfied in an amalgamation, such amalgamation is called amalgamation in the nature of purchase. Under purchase method, The following pints may be considered: Purchasing company is not bound to take over all assets and outside liabilities of vendor company. Purchasing company may use its selection policy to take over assets and liabilities of vendor company. Purchasing company may take over the business of vendor company on the basis of fair values, instead of book values of vendor company. Difference between net assets taken over and purchase consideration (PC) should be recognized as goodwill or capital reserve. (In case PC is higher than net assets taken over, difference is goodwill, otherwise capital reserve). As per the provisions, Goodwill should be written off over the period of 5 years on SLM basis. 5

6. Journal entries in the books of Purchasing Company Business Purchase A/c Dr. xx To Liquidator of Vendor Co. xx Assets taken over Dr. xx Goodwill (Bal Fig.) xx To Liabilities (taken over) xx To Capital Reserve (Bal Fig.) xx Liquidator of vendor Co. Dr. xx To Cash xx To Eq. Sh. Cap. xx To Pref. Sh. Cap xx To any other asset xx 6

7. Example 1 A Ltd. Has taken over the business of B. Ltd. On the following terms: Calculate Goodwill or Capital Reserve if PC is : $ 9,50,000 $ 6,00,000 Also, pass journal entries in the books of purchasing co. assuming PC is payable 50% in cash and rest in equity shares. 7 Items Book Values ($) Market Values ($) Building 1,00,000 5,00,000 Plant 50,000 40,000 Stock 2,00,000 1,80,000 Debtors 4,00,000 3,50,000 Creditors 2,00,000 2,00,000 Debentures 1,00,000 1,00,000

8. Journal entries in the books of Vendor Company In the books of vendor company, the main objective of the accounting is only to close the accounting books. The books of vendor company can be closed by way of the following three accounts: Realization A/c Shareholder’s A/c Cash & Bank A/c (if required). 8

9. 1. Realisation A/c . 9 Particulars Amount Particulars Amount To Fixed Assets xx By Loan xx To Investments xx By Current Liabilities xx To Current Assets xx By Purchasing Co. A/c (PC) xx To Bank (Not taken over liabilities) xx By Bank A/c (Not taken over Assets) xx To Bank (Liquidator’s Expenses) xx By Shareholder’s A/C (Loss) xx To Shareholder’s A/C (Profit) xx xx xx

10. 2. Shareholder’s A/c . 10 Particulars Amount Particulars Amount To Misc. Expenditure xx By Sh. Cap. xx To Realisation A/c (Loss) xx By Reserves and Surplus xx To Equity Shares xx By Realisation A/C (Profit) xx To Preference Shares xx To Assets xx To Cash/Bank xx xx xx

11. 2. Cash and Bank A/c . 11 Particulars Amount Particulars Amount To Bal b/d xx By Realisation A/c (Not taken over Liabilities) xx To Purchasing Co. xx By Realisation A/c (Expenses) xx To Realisation A/c (Not taken over Assets) xx By Shareholder’s A/C (Bal. Fig.) xx xx xx

12. Example 2 Following is the balance sheet of K. Ltd: T. Ltd. agreed to take over the assets of K. Ltd. On the following terms: To take over assets (excluding goodwill of Rs.4000 and cash Rs.1000 included in current assets) at 10 % less than the book values. To take over trade liabilities and debentures. To pay Rs. 8000 for goodwill. The purchase price was to be discharged by the issue of 1000 shares of Rs.10 each at the market value of Rs.15 each and the balance in cash. Liquidation expenses came to Rs.400. Find out the amount of purchase consideration. You are required to maintain books of K Ltd. and T Ltd. 12 Liabilities Amount Assets Amount Share Capital 20,000 Goodwill 4,000 P&L A/C 7,000 Fixed Assets 16,500 Debentures 10,000 Current Assets 19,500 Creditors 3,000 40,000 40,000

13. Nature of Amalgamation Amalgamation in the nature of merger is an amalgamation where there is a genuine pooling not only of assets and liabilities of the transferor and transferee companies but also of the shareholders’ interests and of the businesses of the companies. Moreover, following conditions must be satisfied: All the assets and liabilities of the transferor company become, after amalgamation, the assets and liabilities of the transferee company. 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 the amalgamation, by the transferee company or its subsidiaries or their nominees) become equity shareholders of the transferee company by virtue of the amalgamation. The consideration for the amalgamation receivable by those equity shareholders of the transferor company who agree to become equity shareholders of the transferee 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 13

14. Nature of Amalgamation The business of the transferor company is intended to be carried on, after the 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 except to ensure uniformity of accounting policies. For example, if transferor company is following weighted average method for inventory valuation, the book value of the inventory of the transferor company will be revised by applying the FIFO method (if the transferee company follows FIFO method for inventory valuation). 14