In previous post we have given Cash Flow Statement Latest Notes, Company Financial Statements Notes, Download All Accounting Standards for CA, CWA & CS Exams, and Free Download All IPCC Auditing Standards Quick Revision Notes. Today we are providing Accounting for Amalgamation Auditing Standard 14 Latest Notes for CA , CMA, CS & for other Accounts student.
Amalgamation, Absorption & Reconstruction Notes/ebook:
Amalgamation (AS 14) Meaning:
The popular meaning of “amalgamation” is the dissolution of one or more companies and transfer of business of dissolved entities to another entity. Companies and business entities come together to form a single entity for various reasons, including but not limited to the objective of effecting tax savings. It is essential to be well versed with the accounting treatment to be accorded for such transactions.
Important terms in Amalgamation – defined:
“Tranferor Company” means a company, which is amalgamated into another company. The company selling its business is also called “Vendor Company”.
The company into which a transferor company is amalgamated is called the “Transferee Company”. The Company which acquires (or buys) the business is also called the “Vendee Company”.
1) Amalgamation in the nature of merger
What distinguishes a “merger” from a “purchase”, is the true substance of the transaction. It is helpful to know that the UK-Financial Reporting Standard 6 deals with “merger”. Relevant excerpt from FRS 6 is furnished below
“Merger is a business combination which results in the creation of a new reporting entity formed from the combining parties, in which the shareholders come together in a substantially equal partnership for the mutual sharing of risks and benefits of the combined entity; and in which no party to the combination, in substance, obtains control over any other.. .. .. ..”
Amalgamation deemed to be in the nature of merger if following conditions are satisfied: –
- Business of vendor company must be carried on by the purchasing company.
- All assets and liabilities of vendor company transferred to purchasing company.
- Recorded in new company of assets and liabilities taken over at Book Value of vendor company. (Except to comply with accounting policy)
- Equity shareholders holding 90% shares (except already held) agree to become shareholders in new company.
- Disbursement of Purchase Consideration only in shares except cash for fraction of shares.
2) Purchase Method:
The object of purchase method is to account for amalgamation by applying the same principles as are applied in any normal transaction involving purchase of assets. Accordingly, the following rules are adopted in this method.
- Method to calculate Purchase Consideration:
|Net Asset method||Intansic value method||Net payment method|
|Agreed value ofassets taken over xxx Less: Agreed value ofLiab. taken over xxxPC xxx||MV of total assets xxxLess: MV of total Liab. xxxNet intrinsic value xxx||Amalgamation in nature of: –Merger: Amount paid to Equity shareholders only in the form of equity shares in purchasing company except cash for fraction of shares.Purchase: Cash and agreed value of shares, debentures and other assets given by purchasing company to the liquidator of vendor company For the Shareholders of vendor company.|
|Intrinsic Value = Net Intrinsic valuePer share No. of equity share|
|PC= No. of equity shares purchased X Intrinsic value per share of vendor company|
Note: If information about all the three method is given in the question then we should
follow Net payment method.
3) Entries in books of vendor company:
a) Realisation account:
We have to follow the following procedure
- Transfer all real assets to debit side at Gross Book Value including goodwill but excluding fictitious assets.
- Transfer all outside liabilities to credit side at Gross Book Value but excluding accumulated reserves and surplus.
- If any asset/liabilities not taken over than any realisation on sale of such asset or payment on disbursement of such liabilities is credited/debited to realisation account.
- Amount of Purchase Consideration is credited to realisation account.
- Liquidation expenses debited to realisation account if born by vendor company
- Realisation account is balanced and the balance of this account is profit or loss on realisation, which is transferred to Equity Shareholders Account.
- Assets not taken over if transferred to shareholders account: it must be shown on debit side of shareholders account at Current Value of such asset and a corresponding credit is made to realisation account.
- What are outside liabilities: Preference shareholders and Debenture holders are treated outside liabilities. But proposed dividend is not treated outside liabilities.
- If against any reserve there is any expected liabilities: then to the extent of that expected liability the amount of reserve is transferred to realisation account and balance to shareholders account as usual.
- Any inter company owings or adjustments: is ignored while preparing vendor company books, it is considered only while preparing purchasing company books
b) Equity Shareholders Account:
- Credit side: Equity Share Capital, Accumulated profits and reserves, balance of realisation account.
Debit side: Accumulated losses, Fictitious asset, amount of Purchase Consideration, balance of realisation account
c) Purchasing Company Account:
- Credit side: Amount of Purchase Consideration due.
- Debit side: Discharge of Purchase Consideration.
4) Entries in books of Purchasing Company
a) Three basic entries
|For purchase consideration dueBusiness purchase a/c Dr.
To liquidator of vendor company
|For assets and liabilities taken overAssets taken over Dr.
Goodwill a/c Dr.
To liabilities taken over
To business purchase a/c
To capital reserve a/c
|For discharge of purchase considerationLiquidator of vendor company a/c Dr.
To equity share capital a/c
To share premium a/c
To debentures a/c
To preference share capital a/c
b) For liquidation expenses paid by purchasing company
|Goodwill/Capital reserve a/c Dr.To cash a/c|
c) For cancellation of mutual owings
|Creditor /Bills payable a/c Dr.To Debtors/Bills receivable a/c|
d) For adjustment of unrealised profit
|Goodwill/Capital reserve a/c Dr.To Stock a/c|
e) For carry forward of statutory reserves
|Amalgamation adjustment a/c Dr.To Statutory reserve a/c|
f) If both capital reserve and goodwill appears in books
|Capital reserve a/c Dr.To Goodwill a/c|
- Amalgamation in nature of merger: The entries in the case of amalgamation in the nature of merger is almost similar to the entries given above, the only difference is:
- In the second basic entry above, instead of opening the Goodwill/Capital reserve a/c, the difference between purchase consideration paid and book value of the share capital of vendor company is adjusted in general reserve. If general reserve is not sufficient then balance adjusted in profit & loss account. Similarly any difference in actual debenture value and the amount paid to them is also adjusted to general reserve. If general reserve is not sufficient then balance adjusted in profit & loss account.
- Where ever Goodwill/Capital reserve a/c is debited or credited in above entries we will have to debit or credit general reserve account.
- Following will remain same in both the methods of amalgamation
- Calculation of Purchase consideration.
- Discharge of Purchase consideration.
- Entries in books of vendor company
5) Inter company holding
|Purchasing company held shares in vendor company (PàV)||Vendor company held shares in purchasing company (VàP)||Both vendor and purchasing company held shares in each other (P<àV)|
|Calculation of purchase consideration|
|PC (Given/calculated) xxxLess: % reduction for sharesHeld by purchasingcompany in vendorcompany xxxNet PC xxx||PC (Given/calculated) xxxLess: Value of shares Heldby vendor company inpurchasing company xxxNet PC xxx||PC (Given/calculated) xxxLess: % reduction for sharesHeld by purchasingcompany in vendorcompany xxxLess: Value of shares Heldby vendor company inpurchasing company xxxNet PC xxx
|% = Shares held by X 100purch. comp.Total shares of vendor comp.||Value= No of shares held X Intrinsic value per share|
|Books of Vendor company|
|Realisation account||Realisation account|