Amalgamation of Companies

Traditional Concepts
 Amalgamation: When two existing
companies are liquidated and a new
Co. is formed to purchase them.
Example: A Ltd. & B Ltd. are liquidated
and AB Ltd. is formed to purchase
them.
 Absorption: When an existing
company is purchased another
existing company.
Example: A Ltd. is liquidated and an
existing company B Ltd. purchases it.
Reconstruction

 Reconstruction of an existing loss

making company is done through a
reconstruction scheme to revive it.
It is two types:
 External Reconstruction: When an
existing loss making is liquidated
and a new company is formed to
purchase it. Example: ABC Ltd. Is
liquidated and ABC (2013) Ltd. is
formed to purchase it.
Internal Reconstruction
 When an existing loss making
company is restructured through
reduction in capital to revive it.
 Under the scheme of reconstruction,
sacrifice is made by shareholders,
debentureholders and creditors to
write off accumulated losses,
fictitious assets and overvalued
assets.
AS – 14:
Amalgamation of Companies
 As per AS-14, for the purpose of
accounting, there are two types of
amalgamation:
1. Amalgamation in the nature of
merger
2. Amalgamation in the nature of
purchase
Amalgamation in the nature of Merger
- Conditions
1. Assets and Liabilities: All the assets
and liabilities of the transferor
(vendor) company become the assets
and liabilities of the transferee
(purchasing) company.
2. Equity Share Capital: Shareholders
holding at least 90% or more of the
face value of equity shares of the
vendor company become equity
Shareholders of the transferee
(purchasing) company.
Amalgamation in the nature of merger
- Conditions
3. Purchase consideration: Purchase
consideration due to the Shareholders
of the transferor (vendor) company is
discharged by the transferee company
wholly by the issue of equity shares
(except that cash may be paid in
respect of fractional shares or payment
to dissenting shareholders).
Amalgamation in the nature of merger
- Conditions
4. Business: The business of the
transferor (vendor) company is
intended to be carried on by the
purchasing company.
5. Book Values: No adjustment is to be
made to the book values of assets (by
revaluation or otherwise) of the
vendor company when they are
incorporated in the financial
statements of the purchasing
company.
Amalgamation in the nature of Purchase

If any of the five conditions applicable to

amalgamation in the nature of merger
is not satisfied, it will be considered
“Amalgamation in the nature of Purchase”
 Some Technical Terms

 Business: Taking over the business

means taking all the assets and all
liabilities.
 All Assets: The term ‘all assets’
includes all assets including cash,
bank, goodwill, but excluding fictitious
assets.
 Liabilities: The term ‘Liabilities’ is wider
term and include all outside liabilities
(payable to third parties).
Purchase Consideration

As per AS-14, “Purchase consideration is the

aggregate of 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.”
It means any payment made by the transferee
company for the denture holders or creditors
or any other outside liabilities of the
transferor company shall not be included in
the purchase consideration.
Calculation of Purchase Consideration

 Lump-sum payment method: The

amount of purchase consideration is
given.
 Net assets method
 Purchase consideration = Value of assets
taken over – Value of liabilities
undertaken
 Value of assets shall be taken at (a) agreed
value of asset (if given), otherwise (b) book
value of assets.
Calculation of Purchase Consideration

 Net Payment Method

Rs.
(a Amount of Equity Shares
)
(No. of shares X Issue Price) xx
(b Amount of Preference Shares
)
(No. of shares X Issue Price) xx
(c) Amount
(d) Cash paidof for
Debentures
dissenting
(No. of debentures
shareholders X Issueshares
or fractional Price) xx
Purchase Consideration (Total) x
xx
 Exchange Method or Swap Method
 Under this method, the purchase consideration is
paid by the transferee company to the shareholders
of the transferor company in the form of shares. No.
of shares are calculated on the basis of exchange
ratio between the shares of the transferor company
and transferee company. It is usually based on the
intrinsic value of the shares of the companies.
 Example: A Ltd. Purchases B Ltd. And agrees to
issue 2 equity shares of Rs. 10 each for every 3
shares of B Ltd. Equity Share Capital of B Ltd.
Consists of 1,50,000 shares of Rs. 10 each.
 No. of shares issued = 1,50,000* 2/3 = 1,00,000
shares.
 Purchase Consideration = 1,00,000 x 10 = Rs.
10,00,000
 1,50,000 X 15 = Rs.
 22,50,000
No. of shares to be issued =
22,50,000/25
 = 90,000
 Books of the Transferor Company
(1) Transfer of assets to the Realisation Account
Realisation Account Dr. [With the
total]
To Sundry (individual) Assets A/cs
[With their respective book
values]
Notes:
(i) The assets are transferred to Realisation
A/c at their gross book values. Provisions,
if any, are transferred to the Credit side
of Realisation A/c.
(ii)Factitious assets like Preliminary
expenses, discount on the issue of
the shares/debentures,
underwriting commission, Dr.
balance of Profit and Loss Account,
etc. are never transferred to
Realisation A/c.
(iii)Cash in hand and cash at bank are
transferred to the Realisation A/c
only when these are taken over by
the transferee company.
(iv)Goodwill and other intangible
assets like trademarks, patent rights
etc., are also transferred to
Realisation A/c.
(2) Transfer of outside liabilities to the Realisation A/c
Sundry (Individual) Liabilities A/c Dr.
To Realisation A/c
Notes:
Accumulated or undistributed profits (i.e. credit
balance in the Profit and Loss A/c), general
reserve, capital reserve and other reserves in
the form of profits are not transferred.
(3) On purchase consideration becoming due
Transferee Company’s A/c Dr.
To Realisation Account
(4) On sale of assets not taken over by the transferee
company
Bank Account Dr.
To Realisation A/c
(5) On payment of a liability not taken over by
the transferee company
Realisation A/c Dr.
To Bank A/c
(6) For Premium or Discount on Redemption
of Preference Shares:
(i) For premium
Realisation Account Dr.
To Preference Shareholders’
Account
(ii) For discount
Preference Shareholders’ Account

Dr.
To Realisation Account
(6) For Redemption of Preference Shares:
(i) At premium
Pref. Share Capital A/c Dr
Realisation A/c (Prem. On .
To Preference Shareholders’
Red.) Dr
Account .
(ii) At discount
Pref. Share Capital A/c

Dr.
To Preference Shareholders’ A/c
To Realisation A/c (Discount on
Red.)
(7) For liquidation expenses
(i) When the liquidation expenses are paid
by the transferor company itself:
Realisation Dr
Account To .
(ii) Bank the
When A/c liquidation expenses are
paid by the transferee company,
No Entry
(8) For profit or loss on realisation: the accounting
treatment is as under:
(i) For profit
Realization A/c Dr
To Equity Shareholders’ .
A/c
(ii) For loss
Equity Shareholders’ Dr
A/c To Realisation .
(9) On receiving the purchase consideration
Account
Bank Account Dr
Shares in Transferee Co. .
Debentures in Transferee Dr
Co. To Transferee Company’s .
Account Dr
.
(11) For redemption of Preference Share Capital, if any
(i) Preference Share Capital Dr
A/c .
* Premium on Redemption
To Preference Shareholders’Dr
A/c Account .
*To Discount
(ii) Preference on Redemption
Shareholders’ A/c A/c
Dr.
To Bank A/c
To Preference Shares in
Transferee Co. To Equity Shares in
Transferee Co.
To Debentures in Transferee Co.
(12) Transfer of Equity Share Capital,
Accumulated profits & Reserves to
Equity Shareholders’ A/c.
Equity Share Capital Dr
A/c General Reserve .
A/c Reserve Fund A/c Dr
Capital Reserve A/c .
P & L Appropriation Dr
(Surplus) A/c .
Dr
To Equity .
Shareholders’
Dr
A/c
.
(13) Transfer of accumulated losses to Equity
Shareholders’ A/c.
Equity Shareholders’ A/c
Dr.
To P & L Appropriation
Discount on Issue of(Surplus) A/c
Shares/Debentures A/c To Preliminary
Expenses A/c
To Share Issue Expenses A/c
(14) To Underwriting Commission
A/c Shareholders’ Account
Equity Dr
OnEquity
To payment to Equity
Shares in Transferee Co. .
Shareholders
To Preference Shares in transferee
Co. To Debentures in Transferee
Co.
To Bank Account
Ledger Accounts in The
Books of Transferor Co.
 Realisation A/c
 Transferee Company’s A/c
 Equity Shareholders’ A/c
 Equity Shares in Transferee
Company’s A/c
 Books of Transferee Company –
Purchase Method (Amalgamation in the nature
of Purchase)
1. For purchase consideration due
Business Purchase Account Dr. PC
To Liquidators of the Transferor Co.
PC

2. For recording assets and liabilities

taken over
Sundry Assets (Individual) A/c Dr.
* Goodwill A/c Dr. B/F
To Sundry Liabilities (Individual )
To Business Purchase PC
Account B/F
* To Capital Reserve A/c
 Notes:
 Assets and Liabilities acquired are
recorded are recorded at ‘agreed
value’ otherwise at book value.
 If purchase consideration is more than
net assets, then the difference shall be
debited to Goodwill A/c.
 If purchase consideration less than net
assets, then the difference shall be
credited to Capital Reserve A/c.
1. For payment of purchase
consideration
Liquidators of the Transferor PC
Co.

Dr.
To Equity Share Capital
A/c To Pref. Share
Capital A/c To
Debentures A/c
To Bank A/c
Note:
1. If Shares/Debentures are issued at
discount, ‘Discount on Issue of
Shares/ Debentures A/c’ shall be
debited.
2. If Shares/Debentures are issued at
4. When statutory reserves such as
Development Rebate Reserve, Investment
Allowance Reserve etc. are maintained.
Amalgamation Adjustment A/c
Dr.
To Development Rebate Reserve
A/c To Investment Allowance
Reserve A/c
Note:
1. When these reserves are not
required, the above entry is
reversed.
5. When liquidation expenses of the transferor
company are borne by the transferee
company, following entry is passed:
Goodwill Account Dr.
To Bank Account
6. If a transferee company is newly
formed, for the payment of company
formation expenses:
Preliminary Expenses A/c Dr.
To Bank Account
7. In case, there are both Goodwill and
Capital Reserve Account, Goodwill
should be written off by debiting to
capital reserve. (amount – lower of the
two)
Capital Reserve

Dr.
To Goodwill Account
8. On payment of a liability by the transferee
company
Liability Account Dr.
To Share Capital Account
To Debentures
Account To Bank
Account
 Books of Transferee Company
Purchase Method (Amalgamation in the nature
of Merger)

1. For purchase consideration due

Business Purchase Account Dr. PC
To Liquidator of the Transferor Co.
PC

2. For recording assets, liabilities,

Reserves and Surplus
Sundry Assets (Individual) A/c
Dr. To Sundry Liabilities
(Individual ) To Business
Purchase Account To
………….. Reserve A/c
To Profit and Loss A/c (Surplus)
 Notes:
 Assets and Liabilities acquired are
recorded are recorded at ‘agreed
value’ otherwise at book value.
 If purchase consideration is more than
net assets, then the difference shall be
debited to Goodwill A/c.
 If purchase consideration less than net
assets, then the difference shall be
credited to Capital Reserve A/c.
(8) For profit or loss on realisation: the accounting
treatment is as under:
(i) For profit
Realization Account Dr.
To Equity Shareholders Account
(ii) For loss
Equity Shareholders Account Dr.
To Realisation Account
(9) On receiving the purchase consideration
Bank Account Dr
Shares in Transferee Co. .
Debentures in Transferee Dr
Co. To Transferee Company’s .
Account Dr
.
(11) For redemption of Preference Share Capital, if any
(i) Preference Share Capital Dr
A/c .
* Premium on Redemption
To Preference ShareholdersDr
A/c Account .
To Discount
(ii) Preference on Redemption
Shareholders AccountA/cDr.
To Bank Account
To Preference Shares in
Transferee Co. To Equity Shares in
Transferee Co.
To Debentures in Transferee
Co. To Bank A/c
(12) Transfer of Equity Share Capital,
Accumulated profits & Reserves to
Equity Shareholders’ A/c.
Equity Share Capital and the accumulated
profits and reserves are transferred to Equity
Shareholders’ A/c:
Equity Share Capital Dr
A/c General Reserve .
A/c Reserve Fund A/c Dr
Capital Reserve A/c .
P & L Appropriation Dr
(Surplus) A/c .
Dr
To Equity .
Shareholders’
(13) Transfer of accumulated losses to Equity
Shareholders’ A/c.
Equity Shareholders’ A/c
Dr.
To P & L Appropriation
Discount on Issue of(Surplus) A/c
Shares/Debentures A/c To Preliminary
Expenses A/c
To Share Issue Expenses A/c
(14) To Underwriting Commission
A/c Shareholders Account
Equity Dr
OnEquity
To payment to Equity
Shares in Transferee .
Co.
Shareholders
To Debentures in Transferee
Co. To Bank Account
 Books of Transferee Company –
Purchase Method (Amalgamation in the nature
of Purchase)
1. For purchase consideration due
Business Purchase Account Dr. PC
To Liquidator of the
PC
Transferor
Co.
2. For recording assets and liabilities
taken over
Sundry Assets (Individual) A/c Dr.
* Goodwill A/c Dr. B/F
To Sundry Liabilities (Individual )
To Business Purchase Account PC
* To Capital Reserve A/c B/F
 Notes:
 Assets and Liabilities acquired are
recorded are recorded at ‘agreed
value’ otherwise at book value.
 If purchase consideration is more than
net assets, then the difference shall be
debited to Goodwill A/c.
 If purchase consideration less than net
assets, then the difference shall be
credited to Capital Reserve A/c.
1. For payment of purchase
consideration
Liquidator of the Transferor PC
Co.

Dr.
To Equity Share Capital
A/c To Pref. Share Capital
A/c To Debentures A/c
To Bank A/c
Note:
1. If Shares/Debentures are issued at
discount, ‘Discount on Issue of
Shares/ Debentures A/c’ shall be
debited.
2. If Shares/Debentures are issued at
Premium, ‘Securities Premium A/c’
4. When statutory reserves such as
Development Rebate Reserve, Investment
Allowance Reserve etc. are maintained.
Amalgamation Adjustment A/c
Dr.
To Development Rebate Reserve
A/c To Investment Allowance
Reserve A/c
Note:
1. When these reserve are not
required, the above entry is
reversed.
5. When liquidation expenses of the transferor
company are borne by the transferee
company, following entry is passed:
Goodwill Account Dr.
To Bank Account
6. If a transferee company is newly
formed, for the payment of company
formation expenses:
Preliminary Expenses A/c Dr.
To Bank Account
7. In case, there are both Goodwill and
Capital Reserve Account, Goodwill
should be written off by debiting to
capital reserve.
Capital Reserve

Dr.
To Goodwill Account
8. On payment of a liability by the transferee
company
Liability Account Dr.
To Share Capital Account
To Debentures
Account To Bank
Account
 Books of Transferee Company –
Purchase Method (Amalgamation in the nature
of Merger)
1. For purchase consideration due
Business Purchase Account Dr. PC
To Liquidator of the Transferor Co.
PC

2. For recording assets, liabilities,

Reserves and Surplus
Sundry Assets (Individual) A/c
Dr. To Sundry Liabilities
(Individual ) To Business
Purchase Account To
………….. Reserve A/c
To Profit and Loss A/c (Surplus)
 Notes:
 Assets and Liabilities acquired are
recorded are recorded at book
value.
 If purchase consideration is more than the
Share Capital of the Transferor Co., the
difference being Capital Loss shall be first
adjusted against Capital Reserve, then
against the Revenue Reserve of the
Transferor Co.
 If purchase consideration less than the
Share Capital of the Transferor Co.,
the difference being Capital Profit,
shall be credited to Capital Reserve
1. For payment of purchase
consideration
Liquidator of the Transferor PC
Co.

Dr.
To Equity Share Capital
A/c To Pref. Share
Capital A/c To
Debentures A/c
To Bank A/c
Note:
1. If Shares/Debentures are issued at
discount, ‘Discount on Issue of
Shares/ Debentures A/c’ shall be
debited.
2. If Shares/Debentures are issued at
5. When liquidation expenses of the transferor
company are borne by the transferee
company, following entry is passed:
Goodwill Account Dr.
To Bank Account
6. If a transferee company is newly
formed, for the payment of company
formation expenses:
Preliminary Expenses A/c Dr.
To Bank Account

48
7. In case, there are both Goodwill and
Capital Reserve Account, Goodwill
should be written off by debiting to
capital reserve.
Capital Reserve

Dr.
To Goodwill Account
8. On payment of a liability by the transferee
company
Liability Account Dr.
To Share Capital Account
To Debentures
Account To Bank
Account
THANK YOU