Amalgamation &

Absorption of
Companies

Dr. Himanshu Puri

School of Business
Alliance University
Amalgamation & Absorption

Amalgamation means taking over of the business of two or more

companies by a company newly formed for this purpose (A+B = AB)

The term ‘amalgamation’ Two or more companies join to form a new

contemplates two kinds of company or
activities: Absorption and blending of one by the other.

Absorption means taking over of the business of one or more

companies by a company already in existence (A+B = A)
Amalgamation & Absorption

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

In amalgamation we have generally Vendor or Transferor Company and

two companies called as – Vendee or Transferee Company.
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, 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.
Types of Reconstruction
Internal Reconstruction
It is a process by The object of The existing company
which affairs of a reconstruction is is not liquidated
company are usually to reorganize rather the capital and
reorganized by capital or to debt structure is
revaluation of assets, compound with changed to bring the
reassessment of creditors, so that company back to
liabilities and by company can be normalcy
writing off the losses bailed out from
already suffered, by present situation
reducing the paid-up without winding up
value of shares. the existing
company.
Reconstruction
It is an undertaking is Such external The existing company
being carried on by a reconstruction is is liquidated to form a
company and is in essentially covered new company in
substance under the category of which the existing
transferred, not to an ‘amalgamation in the shareholders become
outsider, but to nature of merger’ in shareholders of new
another company AS 14. company as well
External

consisting
substantially of the
same shareholders
with a view to
its being continued by
the transferee
company.
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 Between All Three
Difference Between All Three
ACCOUNTING FOR AMALGAMATION

• As per AS 14- “ACCOUNTING FOR

AMALGAMATION”, Amalgamation is of
2 types
Amalgamation in the nature of merger

• 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:
 Amalgamation by Way of Merger - 5 Pre-
conditions

1. All the assets and liabilities of the transferor company become, after 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 become
equity shareholders of the transferee company by virtue of the amalgamation.
3. 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.
4. The business of the transferor company is intended to be carried on, after the amalgamation, by the transferee
company.
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. 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).
Amalgamation by Way of Purchase
 Amalgamation by Way of
Purchase

Difference
Between the
Two Ways
 Difference
Between the
Two Ways
 Difference
Between the
Two Ways
Methods of
Accounting
Pooling of
Interest
Method
Purchase
Method
Purchase
Method
 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”.

CONSIDERATION 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.
PURCHASE

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.
 LUMPSUM METHOD: Under this method, the transferee company agrees to pay
a lumpsum/fixed amount to shareholders of the transferor company.
Methods of Purchase
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.
Consideration

NET ASSET VALUE METHOD: Under this method, the purchase consideration is
arrived based on the value of the Assets less the outside liabilities taken over by
the transferee company. As 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.

INTRINSIC VALUE/ SHARE EXCHANGE METHOD: Under this method, the

purchase consideration is calculated at the intrinsic value of shares of the
transferor company.
ACCOUNTING
- BOOKS OF
PURCHASING
CO. (Pooling of
Interest
Method)
ACCOUNTING
- BOOKS OF
PURCHASING
CO. (Pooling of
Interest
Method)
Illustration –
Pooling of
Interest
Solution
Solution
Solution
Solution
 Transferor

ACCOUNTING
- BOOKS OF
PURCHASING
CO. (Purchase
Method)
ACCOUNTING
- BOOKS OF
PURCHASING
CO. (Purchase
Method)

Transferor
Illustration
(Purchase
Method)
Solution

Land

10%

Preference Share
Solution
ACCOUNTING
TREATMENT -
BOOKS OF
VENDOR
ACCOUNTING
TREATMENT -
BOOKS OF
VENDOR
ACCOUNTING
TREATMENT -
BOOKS OF
VENDOR
ACCOUNTING
TREATMENT -
BOOKS OF
VENDOR
ACCOUNTING
TREATMENT -
BOOKS OF
VENDOR
ACCOUNTING
TREATMENT -
BOOKS OF
VENDOR
Illustration
Solution
Solution
Holder
Solution
Solution
Solution
Illustration
Solution
Solution
Solution