0Amalgamation and Reconstruction
- Introduction
In order to survive an organisation should grow over a period of time. Growth is measured in terms of sales or revenue, profits and assets. The competitive forces, globalisation and liberalisation of economics, change in technology, and momentum for strategic alliance has gained lot of importance. The usual form of business combination takes place by way of amalgamations, absorptions and acquisitions.
- Understanding the terms
Amalgamations : When the businesses of 2 or more companies are being taken over by a newly formed company the way of merger is called as Amalgamation.
Absorption : When businesses of one or more companies are taken over by another company the way of merger is called as Absorption.
Acquisition: If one company acquires the controlling interest in another company, it is a case of ‘acquisition’ or take over.
Reconstruction: The term reconstruction mainly refers to reorganisation or restructuring of a company, which has suffered heavy losses or is over capitalised. It may be both internal and external.
- Accounting Standard -14 :Accounting for Amalgamations
- AS – 14 does not recognise the difference between absorption and amalgamation.
- Following terms used in AS-14
- Amalgamation : Amalgamation means an amalgamation pursuant to the provisions of Companies Act,1956 or any other statute which may be applicable to the companies
- Transferor Company : Transferor Company means the company which amalgamated into another company.
- Transferee Company : Transferee Company means the company into which a transferor company is amalgamated.
- Reserves : Reserve means the portion of earnings ,receipts or other surplus of the enterprise(whether capital or revenue) appropriated by the management for a general or specific purpose other than a provision for depreciation or diminution in the value of assets or for a known liability.
- Methods adopted for computation of purchase consideration:-
- Lump sum method: Under this method purchase consideration is agreed upon in totality without attaching individual valuation to assets or liabilities taken over. It is total value of business taken over.
- Take over Method – Under this method the purchase consideration is determined by calculating the net worth of assets taken over by the transferee company. The consideration is arrived at by adding the agreed value of assets taken over minus agreed value of liabilities taken over by the transferee company. This method is also known as ‘Net Assets Method’.
Note: Consideration for equity shareholders may be agreed upon the basis of book value or intrinsic value per share.
Book value per share = Net Assets – Sum due to preference shareholders
Total Number of Equity Shares
Intrinsic value per share = Net Assets (duly revalued) – Sum due to preference shareholders
Total Number of Equity Shares
- Amalgamation in the nature of merger
Conditions to be satisfied:
- All the assets and liabilities of the transferor company become, after amalgamation, the assets and liabilities of the transferee company.
- Shareholders holding not less than 90% of the face value of equity shares of the transferor company(other than the equity shares already held therein), immediately before the amalgamation, by the transferee company or its subsidiaries or their nominees) become equity shareholders of the transferee company by virtue of amalgamation.
- The consideration for the amalgamation receivable by those equity shareholders of the transferor company who agree to 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.
- The business of the transferor company is intended to carried on, after the amalgamation.
- No adjustment is intended to be made in the book value of asset and liabilities of the transferor company when they are incorporated in the books of transferee company except to ensure uniformity of accounting policies.
- Amalgamation in the nature of purchase : If any one of the above mentioned conditions is not satisfied then it is amalgamation in the nature of purchase.
- Disclosure requirements :
- Names and general nature of business of the amalgamating companies.
- Effective date of amalgamation for accounting purposes.
- The method of accounting used to reflect the amalgamation and
- Particulars of the scheme sanctioned under a statute.
- If Pooling of interest method :- Description of shares issued and the amount of difference between the consideration and value of net assets acquired.
- If Purchase Method :- Description of the consideration paid or payable & Any difference between the consideration and value of net assets acquired.
- If Amalgamation takes place after balance sheet date.
- When amalgamation is effected after the balance sheet date but before the issuance of the financial statements of either party to amalgamation.
- Disclosures should be made in accordance with AS – 4, ‘Contingencies and Events occurring after the balance sheet date’
- But the amalgamation should not be incorporated in the financial statements.
- In certain circumstances, the amalgamation may also provide additional information affecting the financial statements themselves.
- For instance, by allowing the going concern assumption to be maintained.
- Accounting entries in the books of transferor company
| Sr.No. | Particulars | Note Ref | Accounting entry |
| 1 | Transfer of book values of the assets | 1 & 2 | Realisation A/c Dr. To Sundry Assets(Individually) |
| 2. | Transfer of liabilities | 2 | Sundry Liabilities(individually) A/c Dr. To Realisation A/c |
| 3. a) | Transfer of amount due to debenture holders |
| Debentures A/c Dr. Realisation A/c (Premium payable on redemption) To Debenture holders A/c |
| b) | Debentures taken over by transferee company |
| Debenture holders A/c Dr. To Realisation A/c |
| 4. | Transfer of amount due to preference shareholders |
| Preference Share Capital A/c Dr. Realisation A/c Dr. (Arrears of dividend /premium payable) To Preference Shareholders A/c |
| 5. | Transfer of Equity share capital, reserves and surplus balances |
| Equity Share Capital A/c Dr. Reserves A/c....................Dr. Profit and Loss A/c Dr. To Sundry Shareholders A/c |
| 6. | Transfer of fictitious assets write off, accumulated losses etc. |
| Sundry Shareholders A/c Dr. To Profit and Loss A/c To Discount on issue of shares A/c To Preliminary Expenses A/c To Other Accounts(Individually) |
| 7. | Purchase consideration(PC) due |
| Transferee Company A/c Dr. To Realisation A/c |
| 8. | Discharge of PC | 3 | Cash/Bank A/c Dr. Equity shares in Transferee Company A/c Dr. Preference shares in transferee Co. A/c Dr. To Transferee Company A/c |
| 9. | Disposal of assets not taken over by transferee company |
| Cash/Bank A/c Dr. To Realisation A/c |
| 10. | Liquidation Expenses | 4 | Realisation A/c Dr. To Cash/Bank A/c |
| 11. | Discharge of liabilities not taken over by transferee company |
| Realisation A/c Dr. To Cash/Bank A/c |
| 12. | Settlement of debenture holders dues(debenture not taken over by transferee company) |
| Debenture holders A/c Dr. To Cash/Bank A/c |
| 13. | Settlement of preference shareholders due |
| Preference shareholders A/c Dr. To Cash/Bank A/c To Preference shares in transferee company A/c To Equity Shares in Transferee Company A/c |
| 14. | Transfer of profit or loss on realisation – Profit
Loss |
|
Realisation A/c Dr. To Sundry Shareholders A/c
Sundry shareholders A/c Dr. To Realisation A/c |
| 15. | Settlement of equity shareholders accounts |
| Sundry shareholders A/c Dr. To Cash/Bank A/c To Equity shares in transferee company |
Notes :
- If cash and bank balances are not taken over by the transferee company, these should not be transferred to Realisation A/c. In that case open separate Cash/Bank Account. The term ‘Assets’ does not include expenses and losses appearing in the balance sheet, not yet written off. The assets however include prepaid expenses.
- Transfer debtors and creditors to Realisation A/c with gross sum, Provision for bad and doubtful debts or provision for discounts are separate accounts and hence should be separately transferred to realisation account. Similar treatment is also required for Gross Fixed Assets and Accumulated Depreciation.
- Value if shares received in Transferee Company at its issue price.
- When the transferor company bears the liquidation expenses. Realisation Account is debited. However, if the expenses are to be borne by Transferee Company, the payment of expenses may be made directly by the transferee company or Transferor Company will get the expenses reimbursed from the transferee company.
- Accounting entries in the books of transferee
Accounting in the nature of merger – Pooling of interest method
| Sr.No. | Particulars | Accounting Entry |
| 1 | Purchase of business | Business Purchase A/c Dr. To Liquidator of Transferor Company A/c |
| 2 | Recording of assets and liabilities | Respective Asset A/c Dr. Reserve A/c # Dr. To Respective liability A/c To Respective Reserve A/c To Business Purchase A/c To Reserve A/c# # Difference between the PC and paid up capital of transferor company |
| 3. | Discharge if purchase consideration | Liquidator of Transferor Company A/c Dr. Discount on issue of shares A/c Dr. To Cash/Bank A/c To Equity Share Capital A/c To Preference Share Capital A/c To Securities Premium A/c |
| 4. | Liquidation expenses(if to be borne by transferee company) paid by transferee company | Reserve A/c Dr. To Cash/Bank A/c |
| a) | Paid by Transferor company | Reserve A/c Dr. To Liquidator of Transferor Company A/c |
|
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