AMALGAMATION

Presented by

Cheranjit Das

DEFINITION

When two or more companies are combined into

one by way of merger or taking over by the other, it

is called amalgamation.

Amalgamation may be of two types• Amalgamation in the nature of merger, and• Amalgamation in the nature of purchase

Transferor/Vendor Company : The company which

is merged to or taken over or absorbed by another

company. It is the company which sells its business.

Transferee/Vendee Company : The company which

takes over or absorbs another company. It is the

company which purchases business of another

company.

AMALGAMATION IN THE NATURE OF MERGER

Following conditions must be satisfied:

1. All assets and liabilities of transferor company become

assets and liabilities of transferee company

2. Shareholders of not less 90% of the shares in transferor

company get Eq. shares in the transferee company. Cash

may be paid for fractional shares.

3. Business of transferor company carried on by transferee

company.

4. No adjustment for value of assets and liabilities of

transferor company made in the books of transferee

company unless it is required to maintain uniformity

in accounting policy.

AMALGAMATION IN THE NATURE OF PURCHASE

When any one or more of the condition for

amalgamation in the nature of merger is followed, it

is called amalgamation in the nature of purchase.

AMALGAMATION IN THE NATURE OF

MERGER:

COMPANY A + COMPANY B=COMPANY C (NEW

COMPANY)

AMALGAMATION IN THE NATURE OF

PURCHASE:

1. COMPANY A ABSORBED BY COMPANY B

2. COMPANY A & B ABSORBED BY COMPANY C

ETC.

METHODS OF ACCOUNTING

There are two main methods of accounting for

amalgamation:

1. Pooling of interest method, and

2. Business purchase method.

POOLING OF INTEREST METHOD

Assets and liabilities of transferor company taken

over by transferee company at book value, unless

valuation required for uniformity in accounting policy.

Difference in purchase consideration and net assets

taken over if any adjusted with reserves.

All reserves of transferor company shown in the

books of transferee company.

All reserves of transferor company will be shown

in the books of transferee company.

This method is followed in case of amalgamation

in the nature of merger.

PURCHASE METHOD

Assets and liabilities are taken over at fair value.

Book value shall be considered when fair value/market

value/realisable amount/amount to be paid not stated.

No reserve except statutory reserve will be shown in

the books of transferee company. Entry

Amalgamation Adjustment A/C…..Dr.

To Statutory Reserve A/C

Difference in net assets taken over and purchase

consideration is dealt as followed:• Purchase consideration > Net assets, difference

being GOODWILL• Purchase consideration< Net Assets, difference

being CAPITAL RESERVE

This method is followed in case of merger in the

nature of purchase.

STATUTORY RESERVES

 Reserve which is created / retained due to

applicability of laws/acts, is called statutory reserve.

Example : Development Rebate Reserve,

Investment Allowance Reserve, Export Profit

Reserve, Workmen’s Compensation Reserve Etc.

JOURNAL ENTRIES

In the books of vendor/transferor company:

1. Open realisation account an transfer all assets at book

value:

Realisation A/C ………………………………Dr.

To Sundry Assets A/C ( Except Cash, when not

stated otherwise)

(Being transfer of assets to Realisation A/c for the purpose

of sale of business to ……ltd.)

2. Transfer liabilities and statutory reserves to

Realisation A/C:

Sundry liabities A/C…………………Dr.

Statutory Reserve A/C ………………Dr.

(Transfer all reserves in pooling of interest method)

To Realisation A/C

(Being transfer of liabilities taken over by…..ltd. To

Realisation A/c)

3. Purchase Consideration Due:

Transferee/Purchasing Company A/C ………Dr.

To Realisation A/C

(Being amount receivable from ….ltd. For sale of

business)

4. Purchase Consideration Received:

Bank A/C ……………………….Dr.

Pref. Shares in …ltd. A/C………...Dr.

Eq. Shares in …ltd. A/C…………Dr.

To Transfee/Purchasing Company A/C

(Being receipt of puchase consideration from sale of

company)

5. Expenses of liquidation :

a. Borne by vendor company:

Realisation A/C………………….Dr.

To Bank/Cash A/C

(Being amount paid as liquidation/ realisation

expenses)

b. Borne by transferee/ purchasing company:

NO ENTRY required

c. 1st Borne by vendor company, then reimbursed by

transferee company :

i. Transferee/Purchasing Company A/C……………..Dr.

To Cash/Bank A/C

ii. Cash/ Bank A/C……………………………….…Dr.

To Transferee/ Purchasing Company A/C

6. Treatment of long term liabilities (Long term loan,

Debenture etc.):

1. Taken over by transferee company

Liability A/C ……………………..Dr.

To Realisation A/C

(Being liability taken over by ….ltd. Transfer to Realisation

A/C)

2. Not taken over by transferee company ( in this case

liability will be discharged by payment of cash):

a. For debeture:

Debenture A/C………………….………..Dr.

Outstanding interest on Debenture A/C ….Dr.

To Debentureholders A/C/

( Being amount due to debentureholders transfer to

DebentureholdersA/C)

Debentureholders A/C…………………………Dr.

To Bank/Cash A/C

(Being debentureholders paid off)

b. For Long term loan:

Loan A/C…………………………………Dr.

Outstanding Interest on Loan A/C………...Dr.

To Bank/Cash A/C

(Being Long term loan/loan paid off along with

interest due on loan)

7. Payment to Pref. Shareholder:

Pref. Share Capital A/C ………………………..Dr.

Realisation A/C (premium if any)…………….....Dr.

To Pref. Shareholders A/C

(Being Pref. Share Capital and premium thereon

transfer to Pref. Shareholders A/C)

Pref. Shareholders A/C…………………………Dr.

To Bank/Cash A/C

To Pref. Shares in ….ltd. A/C

(Being final payment made to Pref. Shareholders)

8. Payment to Eq. Shareholders:

A. At Pooling of Interest method:

Eq. Share Capital A/C ………………………………..Dr.

Realisation A/C..(credit Realiasation A/C if loss)……. Dr.

To Eq. Shareholders A/C

(Being Eq. Share Capital and profit on realisation

transfer to Eq. Shareholdera A/C)

Eq. Shareholders A/C …………………………Dr.

To Preliminary Expenses A/C

To Profit & Loss A/C ( Dr. Balance)

To Other Miscellaneous Expenditure A/C

( Being ……..transfer to Eq. Shareholders A/C)

Eq. Shareholders A/C…………………Dr

To Cash/ Bank A/C

To Eq. Shares in ….ltd. A/C

(Being final payment made to Eq. Shareholders)

B. Purchase Method:

Eq. Share Capital A/C ………………………………..Dr.

Realisation A/C..(credit Realiasation A/C if loss)……. Dr.

To Eq. Shareholders A/C

To Reserves A/C (Other than statutory reserves)

(Being Eq. Share Capital , profit on realisation and

sundry reserves transfer to Eq. Shareholdera A/C)

Eq. Shareholders A/C …………………………Dr.

To Preliminary Expenses A/C

To Profit & Loss A/C ( Dr. Balance)

To Other Miscellaneous Expenditure A/C

( Being ……..transfer to Eq. Shareholders A/C)

Eq. Shareholders A/C…………………Dr

To Cash/ Bank A/C

To Eq. Shares in ….ltd. A/C

(Being final payment made to Eq. Shareholders)

In the books of transferee or vendee company

:

1. Purchase Consideration Due:

Business Purchase A/C……………….Dr.

To Liquidators of ….ltd. A/C

(Amount payable to …..ltd. as per agreement for

business purchase)

2. Transfer of assets and liabilities:

Sundry Assets A/C ( Revalued Fig.)…………………………Dr.

Goodwill A/C ( For extra payment in purchase method)…….Dr.

To Sundry Liabilities A/C

To Reserves ( Pooling of Interest Method)

To Capital Reserve A/C (payment less than net assets purchase

method)

To General Reserve A/C (payment less than net assets POI

Method)

To Business Purchase A/C

(Being assets and liabilities taken over )

3. Liabilities Paid off:

Debenture in …ltd. A/C………….Dr.

To Debenture A/C

To Premium on Debenture A/C

(Being issue of……..to ……of ……ltd. With a premium

of Rs……..)

4. Realisation Expenses paid off:

Goodwill A/C…………………Dr.

To Cash/Bank A/C

(Being realisation expenses paid/reimbursed)

5. Final Payment:

Liquidators of …ltd. A/C…………………..Dr.

To Cash/Bank A/C

To Eq. Share Capital A/C

To Pref. Share Capital A/C

To Securities Premium A/C

(Being final payment made to …….ltd. as per agreement)

6. Mutual indebtness (one company is debtor or

creditor to another):

Sundry Creditors A/C……………………………………Dr.

To Sundry Debtors A/C

(Being adjustment for mutual indebtness)