Accounting for Amalgamation

What is Amalgamation & absorption?

Understanding common difference between amalgamation and absorption is necessary
before moving toward its accounting part
Amalgamation:
In this case two companies get liquidated and one new company forms and it acquires the
liquidated companies business.
For Instance, Two companies X and Y gets liquidated and there is formation of say company
Z, and company Z acquires the two businesses of X and Y.
In this case X and Y is a selling companies (also known as Vendor or Transferor Companies)
and Z is called as purchasing company (also called as Transferee Company).
Absorption:
Absorption represents taking over of two or more companies by an existing Company.
For Instance, Suppose X and Y are taken over by already existing Company Say Company
Z. here, X & Y are Transferor and Z becomes Transferee co.

Two Recognized methods of amalgamation

As my Topic deals with Amalgamation , now I will explain about two recognized methods of
amalgamation recognized by the accounting
1. Amalgamation , where the nature is of merger( Merging)
Transfer of assets and liabilities and also interest of shareholders and of the business of
these companies.
2. Amalgamation, where the nature is of purchase
There may not be transfer of all assets and liabilities and interest of the shareholders and
of the business might not be the same as that of liquidated company.
Indian Accounting standard (AS) 14 that deals with merger accounting. As 14 is only
applicable in case of accounting for transferee co
UK financial Reporting standard 6 also deals with the merger.

Five Golden Criterion's of AS 14

After fulfillment of all of the below cafeterias accounting is said to be of the nature of
merger. If any of the below criteria is not followed then accounting is said to be of the
nature of purchase.
1. Assets and Liabilities criteria
All the Assets and liabilities of the selling Company become assets and liabilities of the
purchasing company.
2.Holding 90% or more shares criteria
Shareholding of the transferor company holding at least 90% of the face value of the
equity shares should become shareholders of the purchasing company because of
amalgamation. But this should not count shares already held pre- amalgamation by
a) Transferor company in the transferee company.
b) One or more subsidiaries of the transferee co in a transferor co.
c) Nominees of the purchasing co in the selling co.

3. Consideration criteria
The consideration paid to the equity shareholders of the selling co in following forms:
a) The form of equity shares
b) For fractional shares, cash may be paid.
4. Continuation of business criteria
The business of the selling co should be carried on post amalgamation by the
transferee co.
5. Book values criteria
The transferee co. should incorporate assets and liabilities at the book values in its
financial statements.

Methods of Accounting
There are two methods used to record amalgamation. Pooling of interest method and
purchase method. If the nature of amalgamation is merger than pooling of interest method
is used whereas if the nature of amalgamation is purchase then purchase method is used

1. pooling of Interest method.

a)Incorporation of assets, liabilities & reserves( capital/revenue/revaluation reserve)
These are recorded at the same carrying amount and exact as at the date of
amalgamation. Profit & Loss account balance if any of the selling co is transferred and
aggregated to the corresponding balance of the transferee co or the second option is to
transfer it to the general reserve if any
b)If the consideration paid to the selling co is less than the paid up capital
of the selling co, then this difference is transferred to the capital reserve and if the case is
vice versa then the difference will be adjusted in capital reserves only and there will be no
goodwill incorporation.
c) In case of Conflicting accounting policies
If the accounting policies of the selling co and purchasing co are not matching then uniform
set of accounting policies are followed. For this purpose transferee co applies AS 5- that is
the effect of changes in accounting policies.

2. Purchase Method
a)Incorporation of assets, liabilities, not reserves.
There are two alternatives available in case of purchase method.
i) Transfer it at the existing carrying amounts
ii) Allocation is done at the individual identifiable assets &liabilities and basis used is the
Fair Market value as per AS 14 ( Fair market value is the arms length price.
b)Non Statutory Reserves
These reserves are ignored in the purchasing companies books and are not carried
forward.
c)Difference between purchase consideration and net assets
If positive- Debited to goodwill account, otherwise transferred to capital reserve account.
d)Amortization of goodwill

Goodwill arising on amalgamation will be amortized usually for 5 years, unless there is
justification for it amortization for a longer period.
e)how to create statutory reserves in purchasing co books
For incorporating statutory reserves in the books of the selling co , corresponding reserve
is given to amalgamation adjustment account , which will be shown under the head,
Miscellaneous
expenditure.

Computation of purchase consideration

For computing purchase consideration, generally two methods are used
1) Purchase Consideration using net asset method: Total of asserts taken over and this
should be at fair values minus liabilities that are taken over at agreed amounts.
2) Purchase consideration using payments method: Total of consideration paid to both
equity and preference shareholders in various forms

Entries that are passed in the transferor co books:

Objective of accounting:
closing transferor co books (reason- sale of the business)
Determination of profit or loss on closing of books of accounts
Entries passed for:
1.Transfer of assets and liabilities of selling co.( at book values and balance sheet values
respectively)
2.Due and receipt entry for consideration
3.sale of assets that are not taken over by the purchasing co
4.Settlement of liabilities that are not taken over by the purchasing co
5.Realization expenses if incurred by the transferor co
6.realization expenses if incurred by the transferor co and reimbursed by transferee co.
7.Amount due to equity shareholders
8.transfer of balance to realization account
9.Settlement to shareholders by transfer of consideration received.

Entries that are passed in the transferee co books:

Entries passed under purchase method
1.Due entry for business purchase
2.Recording of assets and liabilities taken over
3.Discharge of purchase consideration
4.cancellation of inter co Owing
5.Elimination of unrealized profits
6.realization expenses incurred by purchasing co
7.realization expenses incurred by selling co but the same is reimbursed by the purchasing
co
8.Entry for statutory reserve incorporation
Entries passed under pooling of interest method
All entries passed under purchase method, except 8th entry.

Conclusion
For the purpose of Accounting under any circumstances management is required to know
and follow correct accounting policies and use the same in the preparation of financial
statements. Amalgamation topic is of immense importance and corporate Management
should required to know the accounting part.