Accounting for Amalgamations

For CA FINAL

What is Amalgamation?
Amalgam
To unite, to come together as one, to blend Amalgamation
Dissolution of one or more business entities and transfer of business of dissolved entities to another entity

Why Amalgamation?
Large Scale Operations To acquire cash resources Increase Shareholders Value
Eliminate duplicate facilities, processes etc.

Tax Savings

Eliminate Competition

AS-14 Accounting for Amalgamations

AS-14 defines Amalgamation

Amalgamation means an amalgamation pursuant to the provisions of the Companies Act,1956 or any other statute which may be applicable to companies.
Companies Act, 1956 Does not define amalgamation

Courts- Amalgamation includes absorption also.

For Accounting Purposes Amalgamation

Amalgamation in the Nature of Merger

Amalgamation in the Nature of Purchase

Amalgamation in the Nature of Merger

1. All the assets and liabilities of the transferor company become after the amalgamation the assets and liabilities of the transferee company 2. Shareholders holding not less than 90% of the face value of the equity shares of the transferor company becomes the equity shareholders of the transferee company by virtue of the amalgamation For the purpose of computing 90% exclude the Shares already held prior to amalgamation by:
a) Transferee company in the transferor company b) one or more subsidiaries of the transferee company in the transferor company c) Nominees of the transferee company in the transferor company.

Amalgamation in the Nature of Merger

3. The consideration for the amalgamation receivable by those equity shareholders of the transferor company who agree to become shareholders of the transferee company is discharged by the transferee company wholly by the issue of equity shares in the transferee company, except that the cash may be paid in respect of fractional shares. The business of the transferor company is intended to be carried on, after the amalgamation, by the transferee company. No adjustments 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.

4.

5.

Amalgamation in the nature of Purchase AS-14 An amalgamation should be considered to be an amalgamation in the nature of purchase, when any one or more of the conditions specified in paragraph 29 is not satisfied.

Transactions & Events in Amalgamation Determination of Purchase Consideration (PC) Accounting in the books of the transferor company Accounting in the books of the transferee company.

Determination of PC
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 the transferor company. PC = Shares + Other Securities + Cash or other assets

Computation of PC
Computation
Net Assets Method
Aggregate of assets taken over at fair value Less: Liabilities taken over At an agreed amount XXXX XXXX XXXX

Payments Method Aggregate of consideration paid to shareholders

In the books of Transferor Company (Transactions & Events) 1. Assets & Liabilities transferred 2. Settlement of assets & liabilities not taken over by transferee company. 3. Purchase consideration due 4. Purchase consideration received 5. Realisation expenses 6. Amount due to shareholders 7. Settlement of shareholders due

Accounting in the books of transferor company

Assets & Liabilities transferred Realisation A/c Dr. (BV) To Assets A/c (BV) Liabilities A/c Dr. (BV) To Realisation A/c (BV)

Accounting in the books of transferor company

Settlement of Assets & Liabilities not taken over Bank A/c Dr. Realisation A/c Dr. (assuming Loss) To Assets A/c Liabilities A/c Dr. To Bank A/c To Realisation A/c (Discount if any)

Accounting in the books of transferor company

PC Due Transferee Company A/c Dr. To Realisation A/c PC Received Shares/Sec. in transferee co A/c Dr. Bank A/c Dr. To Transferee Co. A/c

Accounting in the books of transferor company

Realisation Expenses

Incurred by Transferee Co.

Incurred by Transferor Co. Realisation A/c Dr.

Incurred by Transferor Co & Reimbursed by Transferee Co.

No Entry

To Bank A/c

1. Transferee Co. A/c Dr. To Bank A/c 2. Bank A/c Dr.

To Transferee A/c

Accounting in the books of transferor company

Amount due to Shareholders Share Capital A/c Dr. Reserve & Surplus A/c Dr. To Shareholders A/c Settlement with the shareholders Shareholders A/c Dr.
To Shares/ Securities in Transferee Co. A/c To Bank A/c

Accounting in the books of Transferee Co. Method of Accounting

Amalgamation in the Nature of Merger

Amalgamation in the Nature of Purchase Purchase Method

Pooling of Interest Method

Amalgamation in the nature of Purchase

Purchase Method: Incorporate Assets & Liabilities at their existing carrying amount or alternatively the consideration should be allocated to individual assets & liabilities on the basis of their fair value. The reserves other than statutory reserves should not be incorporated in the books of transferee company. If PC > Net Assets acquired, recognise excess as Goodwill & If PC< Net Assets then difference is recognised as Capital Reserve.

Amalgamation in the nature of Purchase

Purchase Method Goodwill arising on the amalgamation should be amortised to income on the basis of its useful life. Amortisation period should not exceed five years unless longer period is justified. If Statutory Reserves are required to be maintained, they are maintained by passing the following entry: Amalgamation Adjustment A/c Dr. Statutory Reserves A/c.

Transaction/Events of Transferee Co.

1. 2. 3. 4. 5. 6. PC Due Incorporation of Assets & Liabilities Discharge of PC Realisation Expenses Inter company Owings Maintenance of Statutory Reserves

Accounting entries in the books of Transferee Co.

1. PC Due Business Purchase A/c Dr. To Liquidator of Transferor Co. 2. Incorporation of Assets & Liabilities Assets A/c Dr. Goodwill A/c Dr. (Bal fig.) To Liabilities A/c To Business Purchase A/c To Capital Reserve (Bal fig.)

Accounting entries in the books of Transferee Co.

3. Discharge of PC Liquidator of Transferor Co. A/c To Share Capital A/c To Securities Premium A/c To Bank A/c Dr.

Accounting entries in the books of Transferee Co.

Realisation Expenses

Incurred by Transferor Co.

Incurred by Transferee Co.

Incurred by Transferor Co & Reimbursed by Transferee Co.

No Entry 1. Goodwill /Capital Reserve A/c Dr. To Bank A/c

Accounting entries in the books of Transferee Co.

Inter Company Owings Eliminate the effect of transactions e.g. Creditors A/c Dr. To Debtors A/c Statutory Reserves Amalgamation Adjustment A/c Dr. To Statutory Reserves A/c

Solution to CD Ltd.
Calculation of PC Particulars Freehold prop. Plant & Furnit. Stocks Debtors Less: Creditors Less: Unrec. Liabi. Net Assets Creative Ltd. 12462 4628 13750 (16182) (240) 14418 LG Ltd. 18000 4864 5562 3664 (18260) 13830

Solution to CD Ltd.
Discharge of PC Total PC Share Capital Issued Cash Recd by CD Ltd. Creative Ltd. 14418 (16000) 1582 LG Ltd. 13830 (15000) 1170

Inter Company Holdings

Inter Company Holdings
Purchasing Co. Holding shares in Selling Co. Selling Co. Holding Shares in Purchasing Co.

Cross Holdings

Purchasing Co. Holding shares in Selling Co.

Impact on PC calculation: Total PC (Normal Calculation) Less: Share of Purchasing Co. in the total PC PC to Outsiders XXXX XXXX XXXX

Accounting Effect
Accounting Effect

On Selling Co.

On Purchasing Co.
Cancel the investment in Selling Co at book value in take over entry

Cancel the Capital held by Purchasing Co. (as no PC Recd for that Capital) Equity Share Capital A/cDr. To Realisation A/c

Solution to O Ltd.
Calculation of PC Fixed Assets Investments Current Assets 12% Debentures Creditors Net Assets I V Per Share O Ltd. P Ltd. 110 50 18.75 30 40.25 3.25 11 5.5 8 2.75 150 75 15 60

(-)

Solution to O Ltd.
Calculation of PC Total PC (15 x 500000) = 7500000 Less: Share of O Ltd. = 1875000 PC to Outsiders = 5625000

Selling Co. Holding in shares of Purchasing Co.

Impact on PC Calculation 1. Calculate Total PC (Normal calculation) 2. Find out the break up of PC 3. Find out no. of shares already held by selling co. & then calculate net shares to be issued: Total shares as calculated in (2) XXX (-) Number of shares already held (XXX) Net Shares to be issued XXX

Accounting Impact
Accounting Effect

On Selling Co.
1. Liquidator holding shares in purchasing co @ its cost. 2. Liquidator will receive shares in Purchasing Co as part of the PC @ IP of purchasing Co. 3. Revalue the old shares by taking effect to Realisation A/c.

On Purchasing Co.

No Special Entry

Cross Holding
Impact on PC

Net Asset Method

Payment Method

1. Compute the Net Assets of Selling Co. 2. Determine the net assets pertaining to Outsiders 3. Determine the mode of discharge 4. Deduct the number of shares already held by Selling Co.

1. Determine the PC to Outsiders 2. Deduct the number of shares already held by Selling Co.

Solution to Medium Ltd.

Calculation of PC Holding of Big Ltd. in Small Ltd. 10000/50000 x 100 = 20% Holding of Small Ltd. in Big Ltd. 5000/40000 x 100 = 12.5%

Solution to Medium Ltd.

Big Ltd. Goodwill 150000 Other Sundry Assets 5350000 Investments 1/5th of S (-) Creditors (1250000) Net Assets B Small Ltd. 250000 1300000 1/8th of B (1250000) S

Solution to Medium Ltd.

4250000 + 1/5th of S = B ------------- I 300000 + 1/8th of B = S-------------- II 4250000 + 1/5th (300000+1/8th of B) = B 4310000 + 0.025 = B B= 4310000/.975= 4420512 S= 852564

Solution to Medium Ltd.

Total Net Assets (-) Internal Invest Net PC Big Ltd. Small Ltd. 4420512 852564 (552565) (170500) 3867947 682064

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All the Best!

DINESH KADU. Cell: 09820255184 email: meetdineshsir@gmail.com