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UNIT – IIIACCOUNTING FOR EXTERNAL RECONSTRUCTION (AMALGAMATION/ MERGER/ TAKEOVER/ ABSORPTION) Q1) What is the meaning of the term ‘Amalgamation’?A1)The term ‘amalgamation’ is used when two or more companies carrying on similar business go into liquidation and a new company is formed to take over their business. The term absorption is used when an existing company takes over the business of one or more existing companies. Accounting Standard- 14, “Accounting for amalgamation’ issued by Institute of Chartered accountants of India is applicable in amalgamation and absorption. Q2) What is the meaning of the term trAferor and trAferee company, takeover ?A2)Meaning of TrAferor company: TrAferor company meA the company which is amalgamated into another company. It is also known as Vendor companyMeaning of TrAferee company: TrAferee company meA the company into which a trAferor company is amalgamated. It is also known as purchasing company.Meaning of Takeover: A takeover or acquisition is the purchase of one company by another. We call the purchaser the bidder or acquirer, while the company it wants to buy is the target. It is a type of merger, but not of equals. The Acquiree company continues with its legal and economic identity.Q3) What are the types of Amalgamation? Discuss.A3) From accounting point of view there are two types of Amalgamation:

Amalgamation in the nature of Merger or pooling interests method of Amalgamation: An amalgamation which satisfies all of the following conditions is considered as amalgamation in the nature of merger:

I) All the assets and liabilities of the trAferor company become the assets and liabilities of the trAferee company or purchasing company.II) Shareholders holding not less than 90% of the face value of the equity shares of the trAferor company become equity share holder of the trAferee company by virtue of amalgamation.III) The consideration for the amalgamation receivable by those equity shareholders of the TrAferor company who agree to become equity shareholders of the trAferee company is discharged by the trAferee company wholly by the issue of equity shares in the trAferee company except that cash may be paid in respect of any fractional shares.IV) The business of the trAferor company is intended to be carried on after the amalgamation by the trAferee company.V) No adjustment is intended to be made to the book values of the Assets and liabilities of the trAferor company when they are incorporated in the financial statements of the trAferee company except to ensure uniformity of accounting policies. In this type of amalgamation there is a genuine pooling of Assets and liabilities of the combining entity. 2. Amalgamation in the nature of purchase: An amalgamation is considered to be in the nature of purchase when any one or more of the five conditions specified for amalgamation in the nature of merger as stated above is not satisfied. In this type of amalgamation one company acquires another company and equity shareholders of the combining entities do not continue to have a proportional share in the equity of the combined entity or the business of the company which is acquired not intended to be continued after the amalgamation. Q4) What are the accounting entries in the books of TrAferee company (Purchasing Company)?A4) Accounting entries in the books of TrAferee company (Purchasing Company)It should be noted that AS 14 regulates the accounting treatment of amalgamation in the nature of Merger and in the nature of purchase in the books of TrAferee company only. As per as 14 there are two methods of recording the entries for the assets and liabilities taken over.I) Under the pooling of interest method: This method of accounting is applied to an amalgamation in the nature of Merger. Under this method minimal changes are made in aggregating the assets and liabilities of the individual amalgamating companies. The following steps are taken while making entries under this method in the books of TrAferee company.A) The assets, liabilities and all types of reserves, capital or revenue, or even arising from revaluation of assets of the TrAferor company are recorded by the TrAferee company at their existing carrying amounts and in the same form as at the date of amalgamation unless any adjustment is required due to different accounting policies followed by these companies.B) The balance in the profit and loss account of the TrAferor company should be aggregated with the corresponding balance of the TrAferee company or trAferred to General reserve account.C) The identity of reserves is maintained and these are shown in the balance sheet of the TrAferee company in the same form as they had appeared in the financial statements of the TrAferor company. Journal entries in the books of TrAferee company under pooling of interest method:

On taking over assets and liabilities of TrAferor company:

Sundry Assets account Dr ( individual) ( with respective book values) To Sundry liabilities A/c (individual)(with respective book values)To provision for doubtful debts A/c To other provisions A/c To Surplus in Statement of profit and loss(with book balance) To Reserves (individual) A/c(book balance) To Liquidator of TrAferor company A/c (with purchase consideration) 2. When purchased consideration for Amalgamation is discharged:Liquidator of TrAferor company A/c. Dr (with purchase consideration) To Equity share capital A/c (with face value) To Preference Share capital A/c ( with face value) To securities premium reserve (with premium amount) To Bank A/c (amount of cash paid) To Non cash consideration A/c ( other than shares) 3. When liquidation expenses of the TrAferor company paid by the TrAferee company.A) Liquidation expenses A/c DrTo Bank A/cB) Statement of profit and loss DrTo Liquidation expenses A/c 4. For formation expenses if any of the TrAferee companyPreliminary expenses A/c Dr To Bank A/c II. UNDER PURCHASE METHOD: The following features of the Purchase method must be noted before making accounting entries in the books of trAferee company 1)The assets and liabilities of the trAferor company should be Incorporated in either revalued figures for their carrying amount. 2)general reserve Capital Reserve or Revaluation Reserve of the trAferor company other than stated reserve should not be included in the financial statements of the trAferee company. 3) Statutory reserves of the trAferor company should be carried forward in the books of trAferee company for legal compliance. 4) The amalgamation adjustment account should be disclosed under the head miscellaneous expenditure in the asset side of the balance sheet. When it is found Statutory reserve is no longer required to be maintained both the statutory reserves and amalgamation adjustment account will be eliminated by meA of reverse entry. 5)Any excess of the amount of the Purchase consideration the value of net assets of the trAferor company acquired by the trAferee company shall be treated as goodwill arising on amalgamation in the books of trAferee company. If the value of net assets is more than purchase consideration the difference is credited to Capital Reserve account. Accounting entries in the books of TrAferee company under Purchase method1.For purchase consideration on acquisition of the businessBusiness purchase account Dr( with the amount of purchase consideration)To liquidator of TrAferor company A/c 2.On acquisition of Assets and liabilities of the trAferor companySundry Assets account Dr( individually with respective revalue or fair or book values)To Sundry liabilities account (with revalued or fair or book values)To Business purchase account ( with the amount of purchase consideration)Note: if the total amount of Debit accounts is greater than total amount of credit accounts the difference is credited to Capital Reserve account and if the total amount of debit accounts is less than the total amount of credit accounts the difference is debited to Goodwill account.3.On discharge of purchase considerationLiquidator of trAferor company A/c Dr(with the amount of purchase consideration) debentures account debitTo share capital account ( with nominal value of shares)To securities premium reserve account (with the amount of premium if any)To Debentures account(with the nominal value of debentures issue)To Bank account (with the amount paid in cash) 4.when the statutory reserve such as development rebate reserve, Investment allowance reserve, export profit reserve are maintained.Amalgamation adjustment account Dr.( with the amount of Reserve to respective statutory reserve account.) To Statutory reserve A/c 5.when liquidation expenses of the trAferor company are Borne by trAferee company Goodwill account DrTo bank account 6.For the formation expenses of the trAferee company if anypreliminary expenses account DrTo bank account. In case, there are both goodwill and Capital Reserve account Goodwill may be set off against Capital Reserve.Capital Reserve account Dr (with amount set off to Goodwill account ) To Goodwill A/c 7. on the payment of liability by the trAferee company (respective) liability account Dr (with amount payable).To share capital accountTo debentures account To bank account.Q5) What is Purchase Consideration? Explain the various methods of its calculation.A5) Purchase Consideration – Meaning & MethodsIn case of amalgamation, purchase consideration is the agreed amount which trAferee company (Purchasing company) pays to the trAferor company (Vendor company) in exchange of the ownership of the trAferor company. It may be in form of cash, shares or any other assets as agreed between both the companies.For example, XYZ Ltd is purchasing the business of ABC Ltd for an agreed amount of INR 5000K and 100K shares of INR 10 each. Here, purchase consideration is INR 6000K (5000000 + 1000000).Methods of Purchase Consideration:Following are the different methods of calculating purchase consideration for Amalgamation:

Lump Sum method:

Where the terms of amalgamation provide for payment of a specified sum of money, the consideration for Amalgamation will be taken at that sum and no calculations are needed. 2. Net Worth or Net Assets Method:Under this method, purchase consideration is calculated by adding up the values of various assets taken over by the purchasing company and then deducting there from the values of various liabilities taken over by the purchasing company. The values of assets and liabilities for the purpose of calculation of purchase consideration are those which are agreed upon between the purchasing company and the vendor company and not the values at which the various assets and liabilities appear in the Balance Sheet of the vendor company.(Agreed value of Assets taken over) – (Agreed value of liabilities taken over) = Net AssetsThe following relevant points are to be noted while ascertaining the purchase price under this method:(i) If the trAferee company agrees to take over all the assets of the trAferor company, it would mean inclusive of cash and Bank balances.(ii) The term all assets, however, does not include fictitious assets, like Debit balance of Profit and Loss Account, Preliminary Expenses Account, Discount and other expenses on issue of shares and Debentures, Advertising Expenses Account etc.(iii) Any specific asset, not taken over by trAferee company, should be ignored while computing the purchase price,Iv)If there is any goodwill, pre-paid expenses etc. The same are to be included in the assets taken over unless otherwise stated(iv) The term liabilities will always signify all liabilities to third parties. Trade liabilities are those incurred for the purchase of goods such as Trade Creditors or Bills Payable,(v) Other liabilities like Bank Overdrafts, Tax payable, Outstanding expenses etc. Are not a part of trade liabilities. (vi) Liabilities do not include accumulated or undistributed profits like, General Reserve, Securities Premium, Workmen Accident Fund, Insurance Fund, Capital Reserve, Dividend Equalisations Fund etc. 3. Net Payment Method:The agreement between selling company and purchasing company may specify the amount payable to the share-holders of the selling company in the form of cash or shares or debentures in purchasing company. AS – 14 states that consideration for amalgamation meA the aggregate of shares and other securities issued and the payment made in the form of cash or other assets by trAferee company to the share-holders of trAferor company. Thus, under net payment method purchase consideration is the total of shares, debentures and cash which are to be paid for claims of Equity and Preference share-holders of the trAferor company.The following points are to be noted while ascertaining the purchase price under net payment method: (i) The assets and liabilities taken over by the trAferee company and the values at which they are taken over are not relevant to compute the purchase consideration. (ii) All payments agreed upon should be added, whether it is for equity share holders or preference share-holders.(iii) If any liability is taken over by purchasing company to be discharged later on, such amount should not be deducted or added while computing purchase consideration. (iv) When liabilities are not take over by the trAferee company, they are neither added or deducted while computing consideration. (v) Any payment made by trAferee company to some other party/third party/outside liabilities on behalf of trAferor company are to be ignored. 4. Intrinsic Value Method (Shares Exchange Method): Under this method, net value of assets is calculated according to net assets method and it is divided by the value of one share of trAferee company which gives the total number of shares to be received by the share-holders of trAfer or company from the trAferee company. When the number of shares to be received by the trAferor company is known then it is divided by the existing shares of the trAferor company and thus the ratio of shares can be found out. Suppose, in exchange of 50 shares of trAfer or company, 100 shares of trAferee company is available, then every one share in the trAferor company, two shares in the trAferee company is available. Therefore, the ratio is 1: 2. This method is also known as Share Proportion Method.Intrinsic Value = Assets available for equity shareholders/Number of equity shares Fractional Shares:Sometimes owing to certain ratio in which shares are to be given, it is not possible to find the whole number of shares. Any fraction of shares so arrived at, in the absence of any agreement, is always settled in cash at market value.Q6) K Limited is taken over by Y Limited on the following terms and conditions:I) The assets of K Limited are valued at Rs. 9,80,000II) The liabilities of K Limited are valued at Rs. 530,000III) Rs.240,000 in cash is paid to the shareholders of K Limited.IV) The balance of consideration is discharged by issue of shares of Rs.10 each at Rs. 20 per share. Show how the purchase consideration for Amalgamation is discharged by Y Limited. A6) Calculation of purchase consideration

Assets taken over	Rs. 980,000
Less: Liabilities taken over	Rs. 530,000
Net Assets ( Purchase Consideration)	Rs.450,000

Purchase Consideration for Amalgamation is discharged as under:

Purchase consideration for Amalgamation	Rs.450,000
Less: Discharged in cash	Rs.240,000
Amount to be discharged by issue of shares	Rs. 210,000

Therefore, Number of shares= Rs. 210,000÷ Rs.20= 10,500 Shares. Q7) X Limited is taken over by Y Limited which is having 60000 equity shares of Rs. 10 each. Y Limited agrees to make the following payments:

Cash @ Rs 4.50 per share are for every share held in X Limited.

Issue 3 shares of Rs 10 each at par for every five years held in X Limited.

Discharge of Rs 300000, 12% debentures of X Limited at 10% premium by issuing 13% debentures in Y Limited at par and

Rs. 90000 cash to the creditors of X Limited in final settlement of their account. Determine the amount of purchase consideration for amalgamation as per A S 14.

A7) Calculation of purchase consideration for amalgamation Cash for shareholders: 60000× Rs 4.5 = Rs.270,000 Shares for shareholders: 60000×3Rs.10÷5= Rs.360,000 Purchase consideration for amalgamation=. Rs.630,000Note. Payment made to 12%Debentures and creditors are ignored Q8) The purchasing company agrees to issue four shares of Rs. 10 each for every three shares of Rs. 10 each of the vendor company. The total numbers of shares of the vendor company are 10,000. The market price of each share of the purchasing company is Rs. 15. Find out purchase price. A8)The total number of shares to be issued by the purchasing company to the vendor company = 10,000 x 4/3 = 13,333 1/3 (i.e.13,333 and 1/3)The purchase price = 13,333x Rs 15 each = Rs 1, 99,995In cash Rs 15 x 1/3 Rs 5Total = 2,00,000Note:In the absence of instruction, it is presumed that cash for a fraction of a share will be paid on market price basis.

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