PowerPoint presentation on Amalgamation.ppt

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Ayushi Dasgupta+Foll
1. Transfer of Assets and Liabilities


⋅ Nature of Merger: There is transfer of all assets & liabilities.

⋅ Nature of Purchase: There need not be transfer for all assets & liabilities.

2. Equity Shareholder’s holding 90%

⋅ Nature of Merger: Equity shareholders holding 90% equity shares in transferor company become shareholders of transferee company.

Nature of Purchase: Equity shareholders need not become shareholders of transferee company.

3. Purchase Consideration

⋅ Nature of Merger: Purchase consideration is discharged wholly by issue of equity shares (except cash for fractional shares)

Nature of Purchase: Purchase consideration need not be discharged wholly by issue of equity shares.

4. Same Business

Nature of Merger: The same business of the transferor company is intended to be carried on by the transferee company.

Nature of Purchase: The business of the transferor company need not be intended to be carried on by the transferee company.

5. Recording of Assets & Liabilities

Nature of Merger: The assets & liabilities taken over are recorded at their existing carrying amounts except where adjustment is required to ensure uniformity of accounting policies.

Nature of Purchase: The assets & liabilities taken over are recorded at their existing carrying amounts or the basis of their fair values

1. Amalgamation & External
Reconstruction

2. Meaning of Amalgamation
When two or more existing companies go into liquidation
and a new company is formed to take over their business ,
it is known as amalgamation.
The institute of chartered accountants of India has issued
Accounting Standard 14 (AS 14) on accounting for
amalgamation. This standard specifies the procedure of
accounting for amalgamation and the treatment of any
resultant goodwill or reserve.

3. Types of Amalgamation
From Accounting point of view :
A.Amalgamation in the nature of merger.
B.Amalgamation in nature of purchase.

4. Amalgamation in the nature of Merger
An amalgamation should be considered in nature of merger if it fulfills
following conditions :
1.All assets & Liabilities of the transferor company become
the assets & liabilities of transferee co. after amalgamation.
2.Shareholders holding not less than 90% of face value of
equity share capital of the transferor company (other than
equity shares already held therein, immediately before the
amalgamation, by the transferee company or its subsidiaries or
their nominees) become the equity shareholders of the
transferee by virtue of the amalgamation.
3.The business of transferor company is intended to be
carried on, after the amalgamation by the transferee company.

5. 4.The consideration for 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 issue of equity shares in the company,
except that cash may be paid in respect of any fractional
shares.
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.
In this way there is a pooling of assets and liabilities of the combining
companies under amalgamation. It must be ensured that the resultant
figures of the assets, liabilities, capital and reserve of the combining
entity more or less represent the addition of the relevant figures of
the amalgamation entities.

6. Amalgamation in the nature of Purchase
An amalgamation in nature of purchase takes place when any
one or more of the conditions specified for the amalgamation
in nature of merger is not satisfied.
Under this nature of amalgamation one company acquires
another company and equity shareholders of the combining
entities do not continue to have proportionate share
in the equity of the combined entity or the business
of the combined entity is not intended to be
combined after amalgamation.

7. Absorption
When one or more existing companies go into liquidation and some
existing company buys the business, it is known as absorption.
The major characteristics of the absorption are as follows :
1.There is no formation of any new company.
2.There is an absorption of one or more existing companies
by one existing company.
3.There is only liquidation of absorbed company while the
absorbing company retains its legal entity.

8. External Reconstruction
External reconstruction is effected by liquidating the company.
It is just like by absorption.
In it a new company is formed to purchase the business of
an existing company.
The assets and liabilities of the existing company are
transferred to the newly formed company.
X ltd goes into liquidation and a new company Y ltd comes into
existence to take over the business of X ltd, this is the case of the
External Reconstruction.

9. Difference between Amalgamation,
Absorption & Reconstruction
Basis No of
Distinction
Amalgamation Absorption Reconstruction
1.Formation of a New
Company.
2.No Liquidating
Companies
3.Objective
New company is
formed in a
Amalgamation.
At least two
companies wind up
their business.
The aim of the
amalgamation is to
remove the
competition among
the entities.
No new company is
formed in
absorption.
At least one
company is required
to wind up its
business.
Generally weaker
units are taken over
by strong units
New company is
formed in External
Reconstruction.
One company is
required to wind up
its business.
The aim of the
external
reconstruction is to
write off the
accumulated losses
and fictitious assets.

10. Basis No of
Distinction
Amalgamation Absorption Reconstruction
4.Position of companiesThe position of the
companies is almost
same.
The position of
purchasing company
is comparatively
better than vendor
company.
The position of
vendor company is
bad because of
accumulated losses
and fictitious assets.

11. Purchase Consideration
Purchase Consideration refers to the amount paid by the
purchasing company to the vendor company for the
purchase of business.
The purchase consideration for amalgamation includes the shares
and other securities issued and payment made in cash or other
assets by the transferee company to the shareholders of transferor
company.
It should not include the amount of liabilities taken over by
transferee company, which will be paid directly by this
company.
Payments made to debenture holders should not be
considered as part of purchase consideration.

12. Methods of Purchase Consideration
1. Lump sum Method
2. On basis of Value of Shares or Shares Exchange Method
3. Net Payment Method.
4. Net Worth or Net Assets Method.

13. Lump sum Method
Under this method, purchased consideration is specified at a
particular figure and goodwill or capital reserve is arrived at
on the basis of this figure.
For example, a Company ABC ltd purchase the business of the
company XYZ ltd at an agreed price of Rs.10,00,000 in all. Here
the amount of Rs. 10,00,000 is the purchase consideration.

14. On basis of Value of Shares or Shares
Exchange Method
Under this method, the purchase consideration is required to be
calculated on the basis of intrinsic value of shares.
Intrinsic value is calculated by dividing the net assets available for
equity shareholders by the number of equity shares.
This value determines the ratio of exchange of the
shares between the transferee and transferor
companies.
Intrinsic value of share = Net
assets available for Equity Shareholders Number
of equity shares

15. E.g. Suppose A ltd and B ltd are two companies involved in same
business. Their capital is Rs. 6,00,000 and Rs. 2,00,000 (each of
Rs.10).The two companies arrived to amalgamate in AB ltd. If
each share of A ltd and B ltd is valued at Rs. 10 and Rs. 20
respectively for the purpose of amalagmation, the purchase
consideration will be as under :
A ltd B ltd
60000 [email protected] 600000 -
20000 [email protected] - 400000
Note: While issuing shares to individual shareholders of the selling
company, these may be in fractions. A company cannot issue
shares in fraction but it can issue fractional certificates or
coupons or pay cash for the fractions.

16. 3.Net Payment Method.
Under this method the purchase consideration is arrived at by merely adding
every component of purchase consideration in respect of which the
purchasing company makes payment.
The following Points should be considered at the time of calculation of
purchase consideration:
1.The assets & liabilities taken over by the transferee co. are not to be considered.
2. Any payment whether in cash or shares made by the transferee co. for
shareholders must be considered.
3. If creditors and debtors are taken over by transferee co. to discharge
subsequently such amount should not be considered in purchase consideration.
4. If the liquidation expenses of the transfer co. are to be born by transfer co.,
these should not be increased in purchase consideration.
5. Any payments made by the transferee co. to some other party on behalf of the
transferor co. are to be ignored.
6. When liabilities are taken over by transferee co. they are neither added or
deducted to the amount of purchase consideration.

17. 4.Net Worth or Net Assets Method.
Under this method, purchase consideration is the difference between
the value of the assets taken over and the liabilities assumed.
Net asset or Net worth =
Assets taken over – Liabilities assumed
(at agreed value) (at agreed value)

18. Important points to be considered :
Assets taken over by purchasing Co. should be valued at agreed price.
All assets means not just the tangible assets e.g. cash and bank but the
intangible assets e.g. goodwill, trademarks etc. all taken at agreed value.
The liabilities assumed by purchasing company are deducted at their
agreed value. The term liabilities does not include undistributed profits
like reserve fund ,general fund, share premium, insurance fund.
The consideration for the amalgamation should include any non-cash
element at fair value. In case of issue of securities, the value fixed by the
statutory authorities may be taken to be their fair value.
Where the scheme of amalgamation provide for an adjustment to the
consideration contingent on one or more future events, the amount of
additional payment should be included in the consideration if payment
is probable and a reasonable estimate of the amount can be made.

19. The following entries should be passed in the books of transferor
and transferee companies in the case of amalgamation
In books of Transferor co.
1. For transferring assets taken over by the transferee company.
Realisation a/cDr.
To Various assets (individually)(at book value)
Note : Assets on which some provisions has been made are to be transferred to realisation
account at their gross figures and provisions made should be transferred along with
liabilities.
2. For transferring liabilities taken over by the transferee company.
Various liabilities a/c Dr. (at book value)
To Realisation a/c
Note: Only those liabilities are to be transferred which have been assumed by the
transferee co. If there is any fund which partially represents liability and partially
represents undistributed profit, then that portion which represents liability should be
transferred to realisation a/c.

20. 3. For Purchase consideration
Transferee Company’s a/c Dr.
To Realisation a/c
4. For receiving PC from the transferee Co.
Bank a/c Dr.
Shares in transferee Co. a/cDr.
To Transferee Co a/c
5.For assets sold bt the transferor co. not taken over by the transferee co.
Bank a/c Dr.
Realisation a/c (if loss on sale of assets)Dr.
To Assets a/c
To Realisation a/c (if profit on sale of assets)

21. 6. For Liquidation Expenses
(a) If expenses are to be met by transferor co.
Realisation a/cDr.
To Bank a/c
(b)If Expenses are to be met by transferee co. there are two alternatives :
First alternative : No entry
Second alternative :
(i)Transferee Co. a/cDr.
To Bank a/c
(ii)Bank a/cDr.
To Transferee co.’s a/c
7. For liabilities not taken over by the transferee co. when paid by the transferor co.
Various liabilities a/cDr.
Realisation a/c (if excess payment is made)
To Bank a/c
or
To Shares in transferee Co. a/c
To realisation a/c (if less payment is made)

22. 8. For transferring preference share capital
Preference share capital a/c ..Dr.
Realisation a/c(if excess is to paid) ..Dr.
To Preference Shareholders a/c
To Realisation a/c (if less is to be paid)
9. Preference Share Holders ..Dr.
To equity/Preference Shares of transferee co.
Note : If the arrears of the dividend are to be paid to preference
Shareholders, then such excess amount should be debited to
realisation a/c and credited to preference shareholders a/c.
If the preference shareholders have agreed to get less than
the amount of capital, then reverse entry is to be passed.

23. 10. For closing Realisation a/c
(a)If profit
Realisation a/c..Dr.
To equity Shareholders a/c
(b)If Loss
Equity shareholders a/c..Dr
To Realisation a/c
11. For transferring equity share capital and accumulated profit
Equity Share Capital a/c..Dr.
General reserve a/c..Dr.
Debenture Redemption Fund a/c..Dr.
Dividend equilisation Reserve a/c..Dr.
Securities Premium a/c..Dr.
Profit & Loss a/c..Dr.
Accident Compensation Fund a/c ..Dr.
(to the extent it does not denote the liability)
Shares Forfeited a/c..Dr.
Profit Prior to incorporation a/c..Dr.
Any other reserve or Fund a/c..Dr
To Equity shareholders a/c

24. 12. For transferring accumulated losses and expenses not writtenoff
Equity shareholders a/c..Dr.
To Profit & Loss a/c ( Debit balance)
To Discount or exp on issue of shares or
debentures a/c
To Preliminary Expenses
To Underwriting commission
13. For paying Shareholders
Equity Shareholders a/c..Dr.
To Bank or Shares in Transferee co. a/c

25. Accounting entries in books of transferee
Co.
There are two methods of accounting for amalgamation in the books
of transferee company :
1.The pooling of Interest Method
2.The purchase Method

26. Pooling of Interest method
The following journal entries are to be passed in books of transferee co. for
incorporating the financial statements of the transferor co:
(1) On amalgamation of business
Business Purchase a/c ..Dr.(with amt of PC)
To Liquidators of Transferee Co. a/c
(2) For recording assets & liabilities taken over
Sundry assets(individually) (Book Value)
To Sundry Liabilities(individually) (Book Value)
To Reserves a/c (Book Value)
To Business Purchase a/c (Book Value)
Note :The difference between debits & credits is adjusted in the reserves of
transferee company.

27. Instead Of passing Two entries, one combined entry can be passed.
Sundry assets a/c..Dr
To Sundry Liabilities
To Different reserves of transferee co
To Liquidators of transferor Co.
(3) For making payment to the liquidator of transferor co.
Liquidators of transferor Co. a/cDr.
To Bank/Share Capital/Security Premium
(4) If Liquidation expenses are paid by the transferee company.
General reserve or Profit & Loss a/cDr.
To Bank a/c
(5) For formation expenses of the transferee co.
Preliminary Expenses a/cDr.
To Bank a/c

28. Purchase Method
The following Journal entries are passed in the books of transferee company
for incorporation of the financial statements of the transferor co.
(1) For purchase of business from the transferor company :
Business Purchase a/c..Dr. (For PC)
To Liquidation of transferor co.
(2) For recording assets & liabilities taken over
Various assets a/c ..Dr. (at revised value, if any otherwise at book
value)
To various Liabilities a/c (with figures at which they are taken
over)
To Business Purchase a/c
Note : If credit is more than debit it is debited to Goodwill a/c but if
the debit is more than credit then it is credited to capital reserve
a/c.

29. (3) For making payment to the liquidator of the vendor company :
Liquidators of transferor co. a/c..Dr
To Bank a/c
To Share Capital a/c
(4) When Statutory Reserve is maintained
Amalgamation adjustment a/c..Dr
To Statutory Reserve a/c
(5) If liquidation exp are paid by transferee co.
Goodwill a/c..Dr
To Bank
(6) For Formation exp of transferee co.
Preliminary Expenses a/c..Dr
To Bank a/c

30. (7) When goodwill is written off against Capital reserve
Capital reserve a/c ..Dr.
To Goodwill a/c
(8) If any liability is discharged by the transferee company
Respective Liability a/c..Dr. (with payable amount)
To Share capital/debentures/bank a/c

31. Distinguish between Amalgamation in
nature of merger and Amalgamation
in nature of purchase
In nature of Merger In nature of Purchase
1. In this case transferee co. must acquire
whole business of the transferor co which
includes all assets and liabilities of the
transferor company.
1.Transferee co may or may not acquire all assets
and liabilities of the transferor co.
2. Shareholders having 90% of the face
value of equity shares of transferor co
become the equity shareholders of the transferee
co.
2.This condition is not applicable in case of
amalgamation in the nature of purchase.
3.The claim of equity shareholders of the
transferor co must be discharged by
transferee co by issuing equity shares only,
except in case of fractional shares.
3.The claim of equity shareholders of
transferor company may be discharged by
issuing equity shares or cash.

32. In nature of merger In nature of purchase
4.All assets & liabilities of the
transferor co are taken over by
transferee co at book value as shown by the
balance sheet of the transferor co on the
date of amalgamation.
4. Assets & Liabilities of transferor co may
be taken at book value or agreed value, as per
their agreement.
5. Difference between purchase
consideration and net worth is taken as
general reserve or net profit and loss a/c.
5. Such difference is taken as goodwill or
capital reserve as the case may be.