CHAPTER 2 – AMALGAMATION OF COMPANIES (FULL
EXPANDED, SIMPLE & EXAM■READY)
Amalgamation means combining two or more companies into one. Companies do this to reduce
competition,
increase efficiency, and enjoy the benefits of large■scale production. The three main forms are:
• Amalgamation
• Absorption
• External reconstruction
Below is the complete expanded explanation of every topic in a simple, student■friendly way.
1. AMALGAMATION
Amalgamation happens when two or more companies wind up (liquidate), and a NEW company is
created to
take over their business. The old companies stop existing, and the new one carries on the
operations.
Example:
A Ltd + B Ltd → New company C Ltd formed to take over both.
2. ABSORPTION
Absorption occurs when ONE existing company takes over another existing company. The
purchasing company
continues operating, and the company taken over is liquidated.
Example:
A Ltd (existing) takes over B Ltd (existing). A Ltd continues, B Ltd closes.
3. EXTERNAL RECONSTRUCTION
External reconstruction means one company closes, and a new company is created by the SAME
shareholders
to continue the same business.
Example:
Bharat Ltd is liquidated → New company Nav Bharat Ltd formed by its old shareholders.
DEFINITIONS AS PER AS■14
• Amalgamation – an amalgamation carried out according to Companies Act or relevant law.
• Transferor Company – the company that is being taken over.
• Transferee Company – the company that is taking over.
• Reserve – accumulated profits kept aside for future use.
TYPES OF AMALGAMATION (AS■14)
AS■14 says there are two types:
1. Amalgamation in the nature of merger
2. Amalgamation in the nature of purchase
1. AMALGAMATION IN THE NATURE OF MERGER
A merger is called a merger ONLY when ALL 5 conditions are satisfied:
1. All assets and liabilities of transferor become assets and liabilities of transferee.
2. 90% of equity shareholders of transferor become shareholders of transferee.
3. Purchase consideration is paid ONLY in equity shares (except fractional cash).
4. Business of transferor continues after amalgamation.
5. No change in book values except to match accounting policies.
2. AMALGAMATION IN THE NATURE OF PURCHASE
If ANY of the above 5 conditions is NOT fulfilled, the amalgamation becomes a purchase.
DIFFERENCE – MERGER VS PURCHASE
• Assets & Liabilities: Merger – all taken | Purchase – not necessary.
• Shareholders: Merger – 90% join transferee | Purchase – not required.
• Consideration: Merger – only equity shares | Purchase – any form.
• Business: Merger – must continue | Purchase – may or may not.
• Reserves: Merger – all reserves taken | Purchase – only statutory reserves.
• Values: Merger – book values | Purchase – book or agreed values.
ACCOUNTING METHODS
Two methods exist:
A) Pooling of Interest Method – used only for merger.
B) Purchase Method – used for purchase type.
A. POOLING OF INTEREST METHOD
• Used only for merger.
• All assets, liabilities, reserves recorded at book value.
• Difference adjusted in reserves.
B. PURCHASE METHOD
• Used for amalgamation in nature of purchase.
• Assets and liabilities recorded at agreed value.
• Only statutory reserves taken.
• Difference becomes Goodwill or Capital Reserve.
PURCHASE CONSIDERATION
Purchase consideration is the amount paid by transferee to the shareholders of transferor.
It can be calculated using:
1. Lump Sum Method
2. Net Assets Method
3. Net Payment Method
4. Intrinsic Value Method
1. LUMP SUM METHOD
Fixed amount agreed between transferor and transferee.
Example: X Ltd buys Y Ltd for ■10,00,000.
2. NET ASSETS METHOD
Purchase Consideration = Agreed value of assets taken over – Agreed value of liabilities taken over
Important points:
• Fictitious assets not added.
• Reserves not included.
• Cash included only if taken over.
3. NET PAYMENT METHOD
Purchase consideration = Total payments made to shareholders (cash, shares, debentures).
4. INTRINSIC VALUE / SHARE EXCHANGE METHOD
PC based on the value of equity shares determined by:
Intrinsic Value = Net assets available to equity shareholders ÷ Number of equity shares.
FULL ACCOUNTING PROCEDURE – TRANSFEROR COMPANY
STEP 1 – Transfer assets and liabilities to Realisation Account:
Realisation A/c Dr
To Assets A/c
Liabilities A/c Dr
To Realisation A/c
STEP 2 – Record purchase consideration due:
Purchasing Co. A/c Dr
To Realisation A/c
STEP 3 – Receive consideration:
Shares/Debentures/Cash A/c Dr
To Purchasing Co. A/c
STEP 4 – Sell assets not taken over:
Cash A/c Dr
To Realisation A/c
STEP 5 – Liquidation expenses:
Realisation A/c Dr
To Cash A/c
STEP 6 – Pay preference shareholders:
Preference Share Capital A/c Dr
To Preference Shareholders A/c
STEP 7 – Transfer profit/loss to equity shareholders.
STEP 8 – Transfer all reserves, capital, P&L; to equity shareholders.
STEP 9 – Final settlement of equity shareholders.
FULL ACCOUNTING PROCEDURE – TRANSFEREE COMPANY
1. For purchase consideration:
Business Purchase A/c Dr
To Liquidator of Transferor Company A/c
2. Record assets & liabilities taken over:
Assets A/c Dr
Goodwill A/c Dr (if any)
To Liabilities A/c
To Business Purchase A/c
To Capital Reserve A/c
3. Payment of purchase consideration:
Liquidator A/c Dr
To Shares / Cash / Debentures
4. For statutory reserves:
Amalgamation Adjustment A/c Dr
To Statutory Reserve A/c