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[Link] OF COMPANIES+AS-14
INTRODUCTION:
1. MEANING OF RECONSTRUCTION:
When a company has been making losses for several years, the financial position does not present a
true and fair view of the state of the affairs of the company. In such a company the assets are generally
overvalued, as the balance sheet consists of fictitious assets, unrepresented intangible assets and
debit balance in the profit and loss account (showing the carry forward of losses). Such a situation
always leads the company to show a higher net worth and not depicting a true picture of financial
statements. In short, the company is over capitalized. Such a situation brings the need for
reconstruction/reorganization of the affairs.
2. TYPES OF RECONSTRUCTION:

Types Of
Reconstruction

External reconstruction
Internal Reconstruction
(Provisions of Companies Act, 2013+
(Provisions of Companies Act, 2013)
AS 14 Accounting for Amalgamation)

INTERNAL RECONSTRUCTION:
It is a process by which affairs of a company are reorganized by revaluation of assets, reassessment
of liabilities and by writing off the losses already suffered, by reducing the paid-up value of shares
and/or varying the rights attached to different classes of shares. The object of reconstruction is usually
to reorganize capital or to compound with creditors, so that company can be bailed out from present
situation without winding up the existing company.

EXTERNAL RECONSTRUCTION:
It is an undertaking is being carried on by a company and is in substance transferred, not to an
outsider, but to another company consisting substantially of the same shareholders with a view to its
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being continued by the transferee company. Such external reconstruction is essentially covered under
the category of ‘amalgamation in the nature of merger’ in AS 14.

3. Difference Between Internal and External Reconstruction:

Basis Internal Reconstruction External Reconstruction

Liquidation and The existing company is not liquidated The existing company is liquidated
formation of new rather the capital and debt structure is to form a new company in which
company changed to bring thecompany back to the existing shareholders become
normalcy shareholders of new company as
well
Reduction of capital There is certain reduction of capital There is no reduction of capital.
and varying rights and sometimes the outside liabilities In fact, there is a fresh share
like debenture holders may have to capital of the company. The
reduce their claim inthis scheme. shareholders need not vary their
rights in company

Legal position Internal reconstruction is done as per External reconstruction is regulated

provisions of section 61 and 66 of the by section 232 of the Companies
Companies Act, 2013. Act, 2013.
Legal formalities It requires court’s confirmation and It can be affected without the
other legal procedures before it can be court’s interference and less
implemented time-consuming process.

MEANING OF AMALGAMATION:
1. 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.

2. The term ‘amalgamation’ contemplates two kinds of activities:

a. Two or more companies join to form a new company or
b. Absorption and blending of one by the other.
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3. This arrangement is sought by companies to receive various advantages such as economies of

large-scale production, avoiding competition, increasing efficiency, expansion, increase in market
share, etc

4. In amalgamation we have generally two companies called as –

a. Vendor or Transferor Company and
b. Vendee or Transferee Company.

5. Let us understand the concepts through the following examples

Example 1- Company A and Company B amalgamate to form Company C. Company A and Co 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.

DIFFERENCE AMONG AMALGAMATION, ABSORPTION AND EXTERNAL RECNSTRUCTION:

Basis Amalgamation Absorption External

Reconstruction
Meaning Two or more In this case an In this case, a newly
companies are existing company formed company
wound up and a takes over the takes over the
new company is business of one or business of an
formed to take over more existing companies. existing company.
their business.

Minimum Number At least three At least two companies Only two companies are
are involved involved
of companies companies are

involved involved
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Number of new Only one resultant No new resultant Only one resultant
resultant company is formed. company is formed. company is formed. Under
companies Two companies are this case a newly formed
wound up to form a company takes over the
single resultant business of an existing
company. company.

Objective Amalgamation is Absorption is done to cut External reconstruction is

done to cut competition & reap the done to reorganize the
competition & reap economiesin large scale. financial structure of the
the economies in company.
large scale.

TYPES OF AMALGAMATION:
1. As per AS 14- “ACCOUNTING FOR AMALGAMATION”, Amalgamation is of 2 types.

Types of Amalgamation

Amalgamation in the nature of merger Amalgamation in the nature of purchase

2. 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.
Amalgamation in the nature of merger is an amalgamation, which satisfies all the following
conditions:
a. All the assets and liabilities of the transferor company become, after amalgamation, the assets and
liabilities of the transferee company.
b. 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.
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c. 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.
d. The business of the transferor company is intended to be carried on, after the amalgamation, by
the transferee company.
e. 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).

3. Amalgamation in the nature of purchase:

If any one or more of the above conditions are not satisfied in an amalgamation, such
amalgamation is called amalgamation in the nature of purchase.

Difference between amalgamation in the nature of merger and amalgamation in the nature of
purchase

Best of Distinction Amalgamation in the Amalgamation in the

Nature of Merger Nature of Purchase

(a) Transfer of Assets There is transfer of all There need not be transfer for

and Liabilities assets & liabilities. all assets & liabilities.

(b) Shareholders of Equity shareholders Equity shareholders need not

transferor company holding 90% equity become shareholders of

shares in transferor transferee company.

company become
shareholders of

transferee company.
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(c) Purchase Purchase consideration Purchase consideration need

Consideration is discharged wholly not be discharged wholly by

by issue of equity issue of equityshares.

shares of transferee
company (except cash

only for fractional

shares)

(d) Same Business The same business of The business of the transferor
the transferor company company need not be intended

is intended to be to be carried on by the

carried on by the transferee company.

transfereecompany.

(e) Recording ofAssets & The assets & liabilities The assets & liabilities taken
Liabilities taken over are over are recorded at their

recorded at their existing carrying amounts or

existing carrying the basis of their fair values.

amounts except where

adjustment is required

to ensure uniformity of
accounting policies.

(f) Method of Journal entries for Journal entries for recording the
Accounting recording the merger purchase of business are

are passed by pooling passed by purchase method.

of interest method.
PROBLEMATIC TOPICS

ACCOUNTING ACCOUNTING
CALCULATION OF
TREATMENT IN THE TRATMENT IN THE
PURCHASE
BOOKS OF VENDOR BOOKS OF PURCHASING
CONSIDERATION
COMPANY COMPANY
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PURCHASE CONSIDERATION:
1. As per AS-14, Purchase consideration is 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”.
2. In simple words, it is the price payable by the transferee company to the transferor company for
taking over the business of the transferor company.
3. The important point to be noted here is the amount paid towards the equity shareholders and
preference shareholders is only considered as part of the purchase consideration as per the
definition under AS-14. Hence, it should be noted that purchase consideration does not include
the sum which the transferee company will directly pay to the debenture-holders or creditors of
the transferor company.

METHODS OF PURCHASE CONSIDERATION:

NET PAYMENT NET ASSET VALUE INTRINSIC VALUE

LUMPSUM METHOD
METHOD METHOD METHOD

1. LUMPSUM METHOD:
Under this method, the transferee company agrees to pay a lumpsum/fixed amount to
shareholders of the transferor company.
2. NET PAYMENT METHOD:
Under this method the transferee company makes individual payments to the equity shareholders
and preference shareholders either by way of cash, issue of shares and debentures etc.
3. NET ASSET VALUE METHOD:
Under this method, the purchase consideration is arrived based on the value of the Assets less the
outside liabilities (excluding share capital and reserves) taken over by the transferee company. As
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per AS 14, the value of the assets and liabilities shall be at the value as agreed between the two
parties. If there is no value agreed, then assets and liabilities taken at the book value.
4. INTRINSIC VALUE METHOD:
Under this method, the purchase consideration is calculated at the intrinsic value of shares of the
transferor company.
Purchase consideration= Number of shares in transferor co. x Intrinsic value per share in transferor co.

➢ Number of shares issued as Purchase consideration by transferee company

Number of shares in transferor co. x Intrinsic value per share in transferor co.
Intrinsic value per share in transferee co.

NOTE: Any of the methods or a combination of the above methods can be used by the companies to
calculate the purchase consideration.
Meaning of purchase consideration recorded at par value:
1. In generally purchase consideration will be recorded at Issue value.
I.e Number of shares issued as P.C x Issue price per share
2. If Management decide to record P.C at par value, then
Purchase consideration= Number of shares issued as P.C x Face value per share

ACCOUNTING TREATMENT IN THE BOOKS OF VENDOR COMPANY:

1. AS-14 is not applicable for Accounting in Vendor company. To close the books of selling company
during the process of Amalgamation we will apply General Accounting principles related to closure
of Books of Accounts.
2. FIVE STEP APPROACH:
STEP1: DISMANTLING OF BALANCE SHEET
a. All Assets and Liabilities which are taken over by purchasing company will be closed and
transferred to Realization a/c at book values.
b. If any particular Asset or Liability which is not taken over by purchasing company, opened
separately for the purpose of realization in outside market.
c. Preference share capital will be transferred to Preference shareholders a/c.
d. Equity share capital, Reserves & Surplus, Fictious Assets transferred to Equity shareholders a/c.
 5.6 ADVANCED ACCOUNTING

3. PURCHASE CONSIDERATION
For the purpose of accounting for amalgamations, we are essentially guided by AS-
14 ‘Accounting for Amalgamations’. Para 3(g) of AS 14 defines the term purchase
consideration as 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”. In simple words, it is the price payable by
the transferee company to the transferor company for taking over the business of
the transferor company.
It is notable that purchase consideration does not include the sum which the
transferee company will directly pay to the debentureholders or creditors of the
transferor company. If a certain liability of the transferor company has not been taken
over by the transferee company it will be discharged by the transferor company.
The purchase consideration essentially depends upon the fair value of its elements.
For example, when the consideration includes securities, the value fixed by the
statutory authority may be taken as the fair value. In case of other assets, the fair
value may be determined by reference to the market value of the assets given up
or in the absence of market value, net book value of the assets (i.e. cost less
accumulated depreciation) are considered.
Sometimes adjustments may have to be made in the purchase consideration in the
light of one or more future events. When the additional payment is probable and
can be reasonably estimated it is to be included in the calculation of purchase
consideration.
Illustration 1

Let us consider the draft Balance Sheet of X Ltd. as on 31st March, 20X1:

Liabilities ` (‘000) Assets ` (‘000)

Share Capital: Land & Buildings 50,00
Equity Shares of ` 10 each 75,00 Plant & Machinery 45,00
14% Preference Shares of Furniture 10,50
` 100 each 25,00 Investments 5,00
General Reserve 12,50 Inventory 23,00
12% Debentures 40,00 Trade receivables 24,00
Trade payables and other Cash & Bank balance 15,00
Current liabilities 20,00
172,50 172,50
© The Institute of Chartered Accountants of India
 AMALGAMATION OF COMPANIES 5.7

Other Information:
(i) Y Ltd. takes over X Ltd. on 10th April, 20X1.
(ii) Debenture holders of X Ltd. are discharged by Y Ltd. at 10% premium by issuing
15% own debentures of Y Ltd.
(iii) 14% Preference Shareholders of X Ltd. are discharged at a premium of 20% by
issuing necessary number of 15% Preference Shares of Y Ltd. (Face value ` 100
each).
(iv) Intrinsic value per share of X Ltd. is ` 20 and that of Y Ltd. ` 30. Y Ltd. will issue
equity shares to satisfy the equity shareholders of X Ltd. on the basis of intrinsic
value. However, the entry should be made at par value only. The nominal value
of each equity share of Y Ltd. is ` 10.
Compute the purchase consideration.

Solution

Computation of Purchase consideration (` in ’000) Form

For Preference Shareholders of X Ltd. 3,000 30,000
15% Preference
shares in Y Ltd.
For equity shareholders of X Ltd. 5,000 5,00,000 Equity
(2/3 × 7,50,000) × ` 10 shares of Y Ltd.
of ` 10 each
Total Purchase consideration 8,000
Note: Consideration for debenture holders should not be included above. Such
debentures will be taken over by Y Ltd. and then discharged.

Illustration 2

S. Ltd. is absorbed by P. Ltd. The draft balance sheet of S. Ltd. is as under:

Balance Sheet
` `
Share Capital:
2,000 7% Preference shares Sundry Assets 13,00,000
of ` 100 each (fully paid-up) 2,00,000
5,000 Equity shares of ` 100
each (fully paid-up) 5,00,000
© The Institute of Chartered Accountants of India
 5.8 ADVANCED ACCOUNTING

Reserves 3,00,000
6% Debentures 2,00,000
Trade payables 1,00,000
13,00,000 13,00,000
P. Ltd. has agreed:

(i) to issue 9% Preference shares of ` 100 each, in the ratio of 3 shares of P. Ltd.
for 4 preference shares in S. Ltd.
(ii) to issue to the debenture-holders in S. Ltd. 8% Mortgage Debentures at ` 96 in
lieu of 6% Debentures in S. Ltd. which are to be redeemed at a premium of 20%;
(iii) to pay ` 20 per share in cash and to issue six equity shares of ` 100 each
(market value ` 125) in lieu of every five shares held in S. Ltd.; and
(iv) to assume the liability to trade payables.
You are required to calculate the purchase consideration.

Solution

The purchase consideration will be

` Form
Preference shareholders: 2,000 × 3/4 × 100 1,50,000 9% Pref. shares
Equity shareholders: 5,000 × 20 1,00,000 Cash
5,000 × 6/5 × 125 7,50,000 Equity shares
10,00,000
According to AS 14, ‘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. Therefore, debentures issued to the debenture holders will not be
included in purchase consideration. Like trade payables, the liability in respect of
debentures of S. Ltd. will be taken by P Ltd., which will then be settled by issuing
new 8% debentures.
Illustration 3
Y Ltd. decides to absorb X Ltd. The draft Balance Sheet of X Ltd. is as follows:
` `
3,000 Equity shares of Net assets 2,90,000

© The Institute of Chartered Accountants of India

 AMALGAMATION OF COMPANIES 5.9

` 100 each (fully paid) 3,00,000 Profit and Loss Account 70,000
Preference shares 60,000
3,60,000 3,60,000

Y Ltd. agrees to take over the net assets of X Ltd. An equity share in X Ltd., for purposes
of absorption, is valued @ ` 70. Y Ltd. agrees to pay ` 60,000 in cash for payment to
preference shareholders equity shares will be issued at value of ` 120 each. Calculate
purchase consideration to be paid by Y Ltd. and how will it be discharged?

Solution
Value of 3,000 shares of X Ltd. @ ` 70 = ` 2,10,000
The purchase consideration will be:
= ` 2,10,000 for equity shares + ` 60,000 for Liability towards preference
shareholders
= ` 2,70,000
` 60,000 out of the above will be in cash and ` 2,10,000 in the form of equity shares
of Y Ltd., issued at ` 120 per share; the number of shares that will be issued =
2,10,000/120 = 1,750 equity shares.
Illustration 4
Neel Ltd. and Gagan Ltd. amalgamated to form a new company on 1.04.20X1.
Following is the Draft Balance Sheet of Neel Ltd. and Gagan Ltd. as at 31.3.20X1:

Liabilities Neel Gagan Assets Neel Gagan

` ` ` `
Capital 7,75,000 8,55,000 Plant & 4,85,000 6,14,000
Machinery
Current 6,23,500 5,57,600 Building 7,50,000 6,40,000
liabilities
Current assets 1,63,500 1,58,600
13,98,500 14,12,600 13,98,500 14,12,600
Following are the additional information:
(i) The authorised capital of the new company will be ` 25,00,000 divided into
1,00,000 equity shares of ` 25 each.

© The Institute of Chartered Accountants of India