UNIT 1- THEORY
AMALGAMATION, ABSORPTION &
EXTERNAL RECONSTRUCTION
INTRODUCTION:
Amalgamation: When two or more existing companies combine together to form a
new company, it is amalgamation. All the combining companies are liquidated. A
new company is floated to take over their business.
Absorption: When one existing company takes over the business of one or more
existing companies, it is absorption. The companies whose business is taken over are
liquidated. No new company is formed.
External Reconstruction: When an existing company is liquidated and a new
company is formed with the same shareholders to take over it’s business, it is
external reconstruction sick companies with accumulated losses usually undergo such
reconstruction.
Old Companies called as Vendor Companies and Transferor Company/
seller
New company called as purchasing company and Transferee company/
Buyer
According to AS 14 Purchase Consideration – is the agreed amount which
transferee company pays to the transferor company in exchange of the ownership of
the transferor company. It may be of cash, shares or any other assets as agreed
between both the companies.
1. Lump Sum Method – The buyer and the seller agree on a one lump sum
payment to conclude the transaction which is mentioned in the
agreement. This is the case when transferee company agrees to pay
Transferor company a fixed sum of money. Like XYZ Ltd agrees to pay
ABC Ltd 25 lakhs. This is lump sum method.
2. Net Asset Method/ Net worth method – Under this method, the net
asset value is calculated by deducting all the liabilities taken over by the
transferee company from the entire asset taken by the transferee
company. The value of the assets and liabilities is not appear in Balance
sheet but it is that which is decided between the two companies. Include
cash & Bank balance, all fictitious assets should be ignored. Liabilities
include all the third parties trade creditors or bills payable exclude bank
overdraft, tax payable, outstanding expenses and General reserve,
Capital reserve dividend equalization fund etc…..
Net Assets = Agreed value of assets takeover – Agreed value of
liabilities take over.
3. Net Payment Method – in this case purchase consideration is calculated
by adding all the payments made by the transferee company to the
shareholders of the transferor company. Payment can be in the form of
cash, shares or debentures.
4. Intrinsic Value Method/ Share Exchange Ratio – share of the
purchasing company are exchange with the shares of the selling
company.
Intrinsic Value = Net Assets available to the equity shareholders/
number of equity shares
Ratio of Exchange = Intrinsic Value of Selling Company/ Intrinsic
Value of Purchasing Company.
Types of Amalgamation:
Amalgamation in the nature of merger/ POOLING OF INTEREST
METHOD.
Amalgamation in the nature of purchase/ Purchase method
Amalgamation in the nature of merger/ POOLING OF INTEREST METHOD:
It includes the following:
Transfer of all assets and liabilities
Same equity shareholders holding 90%
Purchase consideration in equity shares
Same business
Recording of Assets and Liabilities at Book Value.
Amalgamation in the nature of Purchase/ Purchase Method:
It is an amalgamation which does not satisfy anyone or more of the
conditions specified for amalgamation in the nature of merger.
