UNIT 3 | unit 3 as 14 amalgamation absorption external reconstruction excluding inter company holdings

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UNIT 3

AS – 14 - Amalgamation, Absorption & External Reconstruction (excluding inter-company holdings)

3.1 OBJECTIVES

After studying this unit the students will be able to:

Understand the Concept of Amalgamation
Calculate the amount of Purchase Consideration
Know the various methods of ascertaining Purchase Consideration.
Make the Accounting Procedure for Amalgamation.

3.2 INTRODUCTION

Amalgamation means coming together of two or more limited companies for betterment of the business. It includes dissolution of one or more limited companies and formation of one new company. There can be three situations as below:

Amalgamation- Here one or more than one existing limited companies come together and form a new limited company to take over their business.

Absorption- Here one existing limited company takes over the business of another existing limited company

External reconstruction- Here one limited company is newly formed to take over the business of another existing limited company which is a loss making company.

3.3 ACCOUNTING STANDARD 14 ISSUED BY INSTITUTE OF

CHARTERED ACCOUNTS OF INDIA

Scope: Accounting Standard 14 [Accounting for Amalgamation], prescribed by the Institute of Chartered Accounts of India, deals with accounting for amalgamations. The meaning and types of amalgamation, according to AS 14 are explained below.

Amalgamation: Amalgamation means an amalgamation pursuant to the provision of the Companies Act, 2013 or any other statute which may be applicable to the Companies, Amalgamation involves acquisition of one company by another. After Amalgamation, the acquired company is dissolved and ceases to exist.

Transferor Company: Transferor Company means the Company which a transferor another Company (vendor company).

Transferee Company: Transferee Company means the Company into which a transferor Company is amalgamated (purchasing company).

3.4 TYPES OF AMALGAMATION

The Companies Act 2013 has not specifically defined the term „Amalgamation‟. However from several legal decisions, the definition of Amalgamation may be inferred. The Institute of Chartered Accountants has introduced Accounting Standard no.14 (AS-14) on Accounting for Amalgamations. The standard recognizes two types of Amalgamations.

Amalgamation in the nature of merger.
Amalgamation in the nature of purchase.

Amalgamation in the nature of merger means which satisfies all the following conditions:

All the assets and liabilities of the transferor company are taken over by 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 of their nominees) become equity shareholders of the transferee company by virtue of the amalgamation.
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.
The business of the transferor company is intended to be carried on after the amalgamation, by the transferee company.
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.

2. Amalgamation in the nature of purchase If Amalgamation does not satisfy any one of the above five conditions then it will be regarded as Amalgamation in the nature of purchase

3.5 DISTINCTION BETWEEN MERGER AND PURCHASE

Merger	Purchase
1. Shareholders of the transferor company holding 90% of the face value of equity shares become shareholders of transferee company.	1. Shareholders of the transferor company may not become shareholders of transferee company.
2. There is a genuine polling of assets and liabilities of the amalgamating companies.	2. There is no genuine polling of assets and liabilities of the amalgamation companies.
3. There is pooling of interest of Shareholders also.	3. There may not be pooling of Interest of shareholders
4. Values of assets and Liabilities, reserves represent the same values of amalgamating companies	4. The values of assets and Liabilities may be different than the amalgamating companies.

In the syllabus of T.Y.B.Com of Mumbai University Amalgamation in the nature of merger is excluded, it is not discussed henceforth in the notes.

3.6 PURCHASE CONSIDERATION

MEANING

Purchase Consideration is the sale price of the business agreed mutually between the two parties, the transferor company (selling company) and the transferee company (purchasing company). The AS 14 defines the Purchase Consideration as “the aggregate of the shares and other securities issue and payment made in the form of cash or otherwise by the transferee company to the “SHAREHOLDERS OF THE TRANSFEROR COMPANY”. In other words any payment made to or in satisfaction of other liabilities should not be included in the amount of purchase consideration. If any payment is made to the creditors, debenture holders or any other liabilities, then it should be assumed that such liability is taken over by the transferee company and then it is settled by the transferee company. It should also be noted that liquidation expenses of the transferor company should not be included in the purchase consideration.

METHODS OF PURCHASE CONSIDERATION

Lump-sum method: The problem may give the amount of purchase consideration directly and hence there will not be any need to calculate the purchase consideration.

e.g. Alka techno Ltd. Agrees to take over business of WLC Ltd for a sum of Rs.10 lakhs.

2. Net Payment Method: If the purchase consideration is not given Lump-sum then this method should be adopted. Here the purchase consideration is arrived at by adding up cash paid and the agreed values of shares, securities issued by the transferee company to share holders of transferor company in discharge of the purchase consideration.

e.g. Reena Engineers Ltd. Takes over business of Ramesh Kashyap Ltd. And agrees to pay the purchase consideration as follows:

Issue of 10,000 equity shares of Rs.10 each at Rs. 12 each and cash Rs. 50,000.

Hence the purchase consideration would be	Rs
10,000 equity shares of Rs.10 each at Rs. 12 each	1,20,000
Cash	50,000
Purchase consideration	1,70,000

3. Net Assets Method: If the purchase consideration cannot be calculated by above two methods then this methods should be adopted. It is the aggregate of the assets taken over at agreed values less liabilities taken over at agreed values.

Assets taken over at agreed values (excluding fictitious assets) Rs. Rs.

Goodwill xx

Land & Buildings xx

Plant & Machinery xx

Furniture & Fittings xx

Motor vehicles xx

Investments xx

Stock xx

Debtors xx

Cash & bank balances xx xxx

Less: Liabilities taken over at agreed value

Creditors xx

Bills payables xx

Bank over draft xx

Debentures xx (xxx)

Purchase consideration xxx

4. Exchange of shares Method / Intrinsic value Method: Under this method the intrinsic value of the shares of both the companies is calculated and then the transferor company issue the shares to the transferee company on the basis of these values.

3.7 ACCOUNTING IN THE BOOKS OF TRANSFEROR COMPANY

Step 1: Open following Ledger Accounts

Realisation A/c

Equity Shareholders A/c

Preference Shareholders A/c

Cash/ Bank A/c

Liabilities not taken over A/c

Transferee company’s A/c

Equity Shares in transferee company A/c

Preference Shares in transferee company A/c

Step 2: Pass following journal entries

Sr. No	Particulars	Dr. Rs	Cr. Rs
1.	Transfer all assets to realization A/c Whether taken over or not, at their book values.
	Realisation A/c Dr.	Xx
	To Sundry assets A/c		Xx
	Note: 1.Fictitious assets should not be transferred to realization A/c
	2. Cash & bank balance should be transferred to realization A/c only if it taken over by the transferee company
	3. Debtors and R.D.D should be treated as separate A/c. Debtors should be transferred at their gross value on debit side and R.D.D should be transferred on the Credit side of realisation A/c
	4. This entry closes all Assets A/c
2.	Transfer all liabilities which are taken over by the transferee company to realization A/c, credit side
	Sundry liabilities A/c Dr.	Xx
	To Realisation A/c		Xx
3.	Open separate A/c for Each liability not taken over and bring down the balance on the credit side.
4.	Transfer Equity Share Capital and Reserves to Equity share holders A/c
	Equity share Capital A/c Dr.	x
	Securities Premium A/c Dr.	x
	Capital Reserve A/c Dr.	x
	Capital Redemption Reserve A/c Dr.	x
	General Reserve A/c Dr.	x
	Profit & Loss A/c Dr.	x
	To Equity Shareholders A/c		x
5.	Transfer Preference Share Capital to Preference Shareholders A/c
	Preference Share Capital A/c Dr.	x
	To Preference Shareholders A/c		x
6.	Record the sale of business
	Transferee Company A/c Dr.	x
	To Realisation A/c		x
	( with the amount of purchase Consideration)
7.	Receive the amount of purchase consideration
	Equity shares in transferee company A/c Dr	x
	Preference shares in transferee company A/c Dr.	x
	Cash/ Bank A/c Dr.	x
	To Transferee Company A/c		x
8.	Dispose off assets not taken over by the transferee company
	Cash / Bank A/c	Dr.	Xx
	To Realisation A/c		Xx
	(No separate entry is required for profit/ loss on this transaction it is automatically adjusted in realization A/c)
9.	Discharge the liabilities not taken over by the Transferee company.
	Liability A/c	Dr.	Xx
	Realisation A/c ( if loss)	Dr.	Xx
	To Cash / Bank A/c		Xx
	To Realisation A/c ( if Profit)		Xx
10.	Payment of realization Expenses
	Realisation A/c	Dr.	Xx
	To Cash/ Bank A/c.		Xx
11.	Settle the claim of preference shareholders
	Preference shareholders A/c.	Dr.	Xx
	Realisation A/c. (if paid at premium)	Dr.	Xx
	To preference Shares in transferee Co. A/c		Xx
	To Cash/ Bank A/c.		Xx
	To Realisation A/c. ( if paid at discount)		Xx
12.	Balance the Realisation A/c. And transfer the profit / loss on Realisation to Equity Shareholders A/c.
	a. If Profit
	Realisation A/c	Dr.	Xx
	To Equity shareholders A/c.		Xx
	OR
	b. If loss
	Equity shareholders A/c.	Dr.	Xx
	To Realisation A/c.		Xx
13.	Close the Equity shareholders A/c.
	Equity shareholders A/c.	Dr.	Xx
	To Equity shares in transferee Co. A/c		Xx
	To Cash/ bank A/c		Xx

3.8 ACCOUNTING IN THE BOOKS OF TRANSFEREE COMPANY

Following Journal Entries are passed in the books of transferee company.

PURCHASE METHOD

Sr.no	Particulars		Dr. Rs	Cr.Rs.
1.	Recording Purchase of Business
	Business Purchase A/c	Dr.	Xx
	To Liquidator of transferor company			X
	(The entry should be passed at consideration amount.)	Purchase

2.	Recording of assets and liabilities taken over
	Sundry assets A/c	Dr.	Xx
	( With Agreed values)
	Goodwill A/c (if any)	Dr.	Xx
	To Sundry Liabilities A/c			X
	To Business Purchase A/c			Xx
	To Capital Reserve A/c(if any)			Xx

3.	Recording Discharge of purchase consideration
	Liquidator of transferor company A/c	Dr.	Xx
	Discount on issue of shares A/c	Dr.	Xx
	To Equity Share Capital A/c.			XX
	To Preference Share Capital A/c.			XX
	To Securities Premium A/c.			Xx

4.	Discharge of Liabilities of Transferor Company
	Debentures of Transferor Company A/c Dr.		Xx
	Discount on issue of Debentures A/c	Dr.	Xx
	To new Debentures A/c.			XX
	To Securities Premium A/c.			Xx

5.	Recording of payment of liquidation expenses
	Capital Reserve/ Goodwill A/c.	Dr.	Xx
	To Cash/Bank A/c.			Xx

6.	Recording of Expenses incurred by the transferee company for its own formation.
	Preliminary Expenses A/c.	Dr.	Xx
	To Cash / Bank A/c			Xx

7.	Recoding of Statutory Reserve of transferor company
	Amalgamation adjustment A/c	Dr.	Xx
	To Statutory Reserve A/c.			XX

8.	Cancellation of mutual indebtedness of transferor & transferee company
	Sundry Creditors A/c.	Dr.	Xx
	To Sundry Debtors A/c.			Xx

	Bills Payable A/c Dr.		Xx
	To Bills Receivable A/c			Xx

	Loans(liability) A/c Dr.		Xx
	To Loans & Advances(Asset) A/c			Xx

9.	Cancellation of Profit in Stock
	Goodwill A/c Dr.		Xx
	To Stock			Xx

Notes:

Entry no 2: Goodwill or capital reserve will arise in case if P.C is calculated as per Net Payment Method.

Goodwill indicates more payment than the actual valuation which is a loss for Transferee co. And

Capital Reserve indicates less payment than the actual valuation which is a profit for Transferee co.

2. Entry no 7: Examples of Statutory reserves are:

Investment allowance Reserve
Development Rebate Reserve
Export Profit Reserve
Project Export Reserve
Tea Development Reserve

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