SUMMARY MEANING AND CONCEPT OF AMALGAMATION, ABSORBTION, EXTERNAL RECONSTRUCTION.

PURCHASING CONSIDERATION.

METHODS FOR CALCULATING OF PC.

METHODS OF AMALGAMATION (Purchase

& Merger).

CONDITIONS FOR AMALGAMATION IN THE

NATURE OF MERGER.

ACCOUNTING TREATMENTS FOR CLOSING THE BOOKS OF AMALGAMATING COMPANIES.

ACCOUNTING ENTERIES IN THE BOOKS OF AMALGAMATED COMPANIES PURCHASE METHOD V/S MERGER METHOD

SPECIAL POINTS WHILE SOLVING SUMS.

CONCEPT OF AMALGAMATION, ABSORBTION AND EXTERNAL

RECONSTRUCTION

AMALGAMATION

• 2 old company are existed

• 1 Brand New Company formed

• Both old company are liquidated.

ABSORBTION

• 2 old company existed

• 1 existing company will takeover other existing company.

• Company taken over will be Liquidated

EXTERNAL RECONSTRUCTION

• Only 1 existing loss making company

• 1 Brand new company formed to take over loss making company

• 1 loss making company will be liquidated.

AMALGAMATION .

A LTD Existing company

B LTD Existing company

AB LTD Brand new Company

AMALGAMATED COMPANY

ABSORBTION

.

A LTD Existing company

B LTD Existing company

TAKEN OVER BY

EXTERNAL RECONSTRUCTION .

A LTD Existing Loss Making

company

B LTD Brand New Company

formed company

TAKEN OVER BY

PURCHASE CONSIDERATION Purchase Consideration is the Price which Amalgamated Company

(Buyer co) will be agreed to pay to the amalgamating company(seller co) for

acquisition of business.

As per AS-14 Purchase Consideration will include any payments

made to Preference Shareholders and Equity shareholder only.

If any payment is made by new company to debenture holders or

creditors of old company then such payment is not to be

included in calculation of PC. Here, it will mean that new co. has taken

over debenture/creditors as a liabilities and then payment is made by

new company after takeover. Therefore, the effect of such payment will

come in new company.

There are 3 Methods for calculating PC

i. Lump sum Method

ii. Net Payment Method

iii. Net Assets Method

PC BY LUMP SUM METHOD PC by Lump Sum method is a Predetermined fixed amount mutually

agreed between buyer company (New co.) and seller company (old co.)

there can be bal. fig for any modes of payment

Several assets are acquired for a single price that may be lower than a sum of individual assets fair value.

Allocation of Lump sum Price is based on relative fair value of the individual assets

Land & Building Plant & Machinery Other

Assets/Liabilities E.g. A Ltd. Purchase the Business of B. Ltd. for Rs 10,00,000. (if like this amount of

PC directly given in the Question then it is PC by Lump sum method).

Discharge of PC: PC was paid by A ltd by issuing equity shares of Rs 5,00,000 ,

Preference Shares Rs 3,00,000 and balance in Cash.

If PC is by Lump sum Method then while entry for recording Assets and liability

of old co. in new co. there can be balancing figure as Goodwill/Capital Reserve.

PC BY NET PAYMENT METHOD PC by Net Payment Method is derived by adding the value of all

modes of payment . There will never be any bal. fig. for any

modes of payment

PC By Net Payment Method

Rs.8,00,000

Equity Shares

Rs. 3,00,000

Preference Shares

Rs.4,00,000

Cash or any other Security (e.g. Debentures)

Rs.1,00,000

E.g. P ltd. purchases the Business of Q ltd .P Ltd. discharge the PC as follows Equity

shares Rs.3,00,000 , Preference Shares Rs 4,00,000 , Cash Rs.1,00,000 (if

information is given like this then the PC Shall be calculated by Net Payment

Method.).

PC = 3,00,000 +4,00,000 + 1,00,000 =Rs.8,00,000 If PC is by Net Payment Method then while entry for recording Assets and

liability of old co. in new co. there can be balancing figure as Goodwill/Capital

PC BY NET ASSET METHOD PC by Net Assets Method is calculated as the difference between

Assets taken over(AV) and Liabilities taken over(AV). There can

be a balancing figure for any modes of payment

Assets

taken over

(AV)

Liabilities

taken

over (AV)

PC by Net

Assets

Method

E.g. X ltd. Purchase the Business of Y Ltd. the details of the assets and liabilities

taken over are as follows:

Total Value of the Assets taken over at agreed Value are Rs.30,00,000 and Total

Value of Liabilities taken over was Rs.10,00,000; The PC was discharged by X ltd. by

issuing equity shares of Rs.10,00,000 , preference share of Rs.5,00,000 and balance in cash. (if information is given like this then the PC Shall be calculated by

Net Asset Method)

PC = 30,00,000 – 10,00,000 = 20,00,000

Discharge of PC:

Equity Share Capital – Rs. 10,00,000 Preference Share Capital – Rs.5,00,000

Balance in Cash - Rs. 5,00,000 (i.e. 20,00,000-10,00,000-5,00,000)

.

AMALGAMATION

IN THE NATURE OF MERGER/POOLING

OF INTEREST

IN THE NATURE OF PURCHASE

Conditions for Amalgamation in the Nature of

Merger 1. All the Assets and Liabilities (including reserves)

of old company are taken over by new company.

2. at least 90% of Equity share holders (in value) of

old company should become Equity share

holders of new company.

3. New company intends to carry on similar Business that of Old Company.

All Assets and

Liabilities of Old co

Assets and liabilities

of New Co. Will become

Minimum 90%

shareholders (in value)

of Old co

Shareholders of New

Company. Should become

4. All the assets & All Liabilities of old Company are taken over at Book value (except to follow common accounting policy).

5. In Discharge of PC:

Conclusion: If all the above conditions are satisfied , then it is known as

amalgamation in the Nature of Merger. If any one or more of the above

conditions are not Satisfied then it is known as amalgamation in the nature

of Purchase.

Preference Share Holders of old co.

Equity Share/Preference

Share/Debenture/Cash in new company.

Given

Assenting Equity

Shareholders (min 90% S/H in value) of

old company

Only Equity Shares in new

company and Cash for the fractional Shares in new

company

Given

Dissenting

Shareholders (balance 10% or less S/H) of old

company

Equity Share/Preference

Share/Debenture/Cash in

new company.

Given

CLOSING THE BOOKS OF OLD COMPANY

STEPS FOR CLOSING THE BOOKS OF

OLD COMPANY

. Step 1: Transfer of balance sheet item at

balance sheet value

Assets Side Fictitious Assets and Past Loss – Equity Share holders A/C Debit side.

Cash/Bank A/c

-If taken over by new company-

Realisation A/c debit side - If Not taken over by new company-

Cash Bank A/c Debit side as Opening balance

All remaining Assets whether taken over by new company or not

Realisation A/c Debit Side

Liabilities Side Equity share Capital- Equity shareholder a/c Credit side.

Preference Share Capital Pref. Share Capital a/c Credit side.

Reserves/ past profits including

statutory Reserves- Equity shareholder a/c Credit side.

All remaining liabilities whether taken over or not-

Realisation a/c credit side.

New Co. A/c Dr XXX

To Realisation A/c XXX

Equity shares in New Co. A/c Dr. XXX

Pref. Shares in New Co. A/c Dr. XXX

Debentures in New Co. A/c Dr. XXX

Cash/Bank A/c Dr. XXX

To New Co. A/c XXX

[Securities in New company will be recorded at issue Price]

Step 2: Recording Purchase Consideration

Step 3: Discharge Purchase Consideration

Cash/Bank A/c Dr. XXX

To Realisation A/c XXX [Journal is to be passed for actual amount received on sale ignoring the profit

and loss on sale]

Realisation A/c Dr. XXX

To Cash/Bank A/c XXX [Journal is to be passed for actual amount paid]

Step 4: Sale of Assets not taken over by New co.

Step 5: Payment of Liabilities not taken over by New

co.

Case I: Old Company pays and Old Company bears. Realisation A/c Dr. XXX

To Cash/Bank A/c XXX Case II: New Company pays and New Company bears

No Entry in the books of Old company.

Case III: Old company pays and new company Reimburse. (a) Old Company pays (for amount paid) New Co.A/c Dr. XXX

To Cash/Bank A/c XXX

(b) New Company Reimburse (amount received)

Cash/Bank A/c Dr. XXX

To New Co. A/c XXX

(c) Difference if any shall be transferred to Realisation A/c

Realisation A/c Dr. XXX

To New Co A/c XXX

Step 6: Payment of Realisation/ Liquidation/ winding

up expenses of old Co.

Preference Shareholder A/c Dr. XXX

To Equity Shares in New Co A/c XXX

To Pref. Shares in New Co A/c XXX

To Debentures in New Co A/c XXX

To Cash/Bank A/c XXX

Step 7 : Payment to Preference Shareholders

Step 8 : Close the Preference Shareholder A/c and

transfer the difference if any, to Realisation A/c

If Profit

Realisation A/c Dr. XXX

To Equity Shareholders A/c XXX

If Loss

Equity Shareholders A/c Dr. XXX

To Realisation A/c XXX

Step 9: Close Realisation A/c and transfer the Profit or Loss to Equity shareholder A/c

Equity Shareholders A/c Dr. XXX

To Equity share in New co A/c XXX

To Pref. Share in New co A/c XXX

To Debentures in New co A/c XXX

To Cash/ Bank A/c XXX

Step 10:Close securities in New Company A/c and

Cash/Bank A/c & transfer the balance if any to

Equity shareholders A/c. it is also known as

payment to Equity Shareholders.

Finally Equity

Shareholder A/c Should

tally

Recording the Entries in the books of New company NATURE OF PURCHASE

1. Record of PC.

2. Record Assets & Liabilities of

old company taken over (at AV)

[Goodwill or capital Reserve as a

balancing figure will arise in case of

lumpsum method or Net payment

Method]

NATURE OF MERGER

1. Record of PC

2. Record Assets & Liabilities of

old company taken over (at BV)

[Any difference in 2nd entry should

be adjusted in Reserves for which

working note to be prepared]

(SEE CHART – Slide 27)

Business Purchase A/c Dr XX

To Liquidator of Old Co.A/c XX SAME

Individual Assets A/c Dr XX

Goodwill A/c (Bal.fig.) Dr. XX

To Individual Liabilities A/c XX To Business Purchase A/c XX

To capital Reserve A/c (Bal. fig.) XX

Individual Assets A/c Dr. XX

Fictitious Assets A/c Dr XX

To Individual Liabilities A/c XX To Reserves & Surplus A/c XX

To Business Purchase A/c XX

3. Discharge of PC

4. Carry forward of Statutory Reserves of old Co.

3. Discharge of PC

4. Carry forward of Statutory Reserves of old Co.

Liquidators of old Co. A/c Dr XX

Disc. on issue of Share/deb. A/c XX To Equity Share capital A/c XX

To Pref. Share capital A/c XX

To Debentures A/c XX To Cash/Bank A/c XX

To Securities Premium A/c XX

SAME

Amalgamation Adjustment A/c Dr. XX

To Invt. Allowance Reserve A/c XX

To Devt. Rebate Reserve A/c XX To Foreign Project Reserve A/c XX To Housing Project Reserve A/c XX To Export Profit Reserve A/c XX

To Other Statutory Reserve A/c XX

[ this entry is to be reversed after the

statutory period is over.]

This entry is not required as all the statutory Reserves will be already

incorporated in 2nd entry.

5. Payment for Settlement of

Debenture holders of old

company

6. Payment to creditors/other liability of old co.

5. Payment for Settlement of Debenture holders of old company

6. Payment to creditors/other liability of old co.

__% Debentures (old Co.) A/c Dr. AV

Disc. On issue of Deb A/c Dr. Disc.

To __% Debentures (new Co.)A/c FV To Securities premium A/c Prem. [ if New co. debenture is at Discount then discount on issue of debenture is debited. If

new companies debenture is at premium then

Securities Premium is credited in the above entry. And Debenture in new company is recorded at FV]

SAME

Creditors A/c Dr. XX

To Cash/ Bank A/c XX

[Take any other modes of payment if different mode of payment to creditors is given in the Question]

SAME

7. Fresh issue

8. Payment of Underwriters

Commission

9. Preliminary Expenses of New co.

7. Fresh issue

8. Payment of Underwriters Commission

9. Preliminary Expenses of New co.

Cash/Bank A/c Dr. XX Disc. On issue A/c Dr. XX

To Equity Share Capital A/c XX

To Pref. Share Capital A/c XX

To __% Debentures A/c XX To Securities Premium A/c XX

SAME Underwriting Commission A/c Dr. XX

To Cash/Bank A/c XX

[Calculate on issue Price]

SAME

Preliminary expenses A/c Dr. XX

To Cash/Bank A/c XX SAME

10. Payment of Realisation/ Liquidation expenses/ winding up expenses of Old Co.

10. Payment of Realisation/ Liquidation expenses/ winding up expenses of Old Co.

(a) New Company Pays & New Company Bears

Goodwill/Cap Reserve A/c Dr XX

To Cash/Bank A/c XX

[Goodwill or capital Reserve will depends upon balancing fig in 2nd entry. If no balancing figure is there

then debit Goodwill A/c]

(b) Old Company Pays & New Company

Reimburse.

(i) Old Co. Pays - NO ENTRY (ii) New Co. reimburse – same as entry

in (a) above

(C) Old Company Pays - NO ENTRY

(a) New Company Pays & New Company Bears

Reserve A/c Dr. XX

To Cash/Bank A/c XX

(b) Old Company Pays & New Company

Reimburse.

(i) Old Co. Pays - NO ENTRY (ii) New Co. reimburse – same as entry

in (a) above

(C) Old Company Pays - NO ENTRY

11. Cancellation of inter company debt.

12. Cancellation of Unrealized Profit in stock

11. Cancellation of inter company debt.

12. Cancellation of Unrealized

Profit in stock

Liabilities (e.g. Creditor) A/c Dr. XX To Assets (e.g. Debtors) A/c XX

[ above entry will be passed only if the

amount is receivable or payable

between the companies]

SAME

Goodwill/Cap Reserve A/c Dr. XX To Stock A/c XX

Above entry will be passed if the following conditions are satisfied. (i) Goods are sold by one company to

other company at profit.

(ii) Such Goods are still existing in the

closing stock of the company which had purchased such goods (i.e.

receiver of the goods).

Reserve A/c Dr. XX To Stock A/c XX

Above entry will be passed if the following conditions are satisfied. (i) Goods are sold by one company to

other company at profit.

(ii) Such Goods are still existing in the

closing stock of the company which had purchased such goods

(i.e. receiver of the goods).

CALCULATION OF PROFIT OR LOSS ON MERGER

Purchase Consideration XXX

Less: Share Capital (Equity + Pref.) (XXX)

XXX

LOSS PROFIT

PC > Share Capital PC < Share Capital

This Loss should be adjusted against

Reserve of old company and new

company. If the loss is still greater then

Show it as Profit & loss Debit balance . NOTE: Statutory Reserve must not be

used to write off loss

(1) This profit should first used to write off Profit & loss Debit

balance of old co. if any.

(2) Add balance Profit to Reserves (General Reserves or Profit &

Loss)

Special Points while Solving Sums If it is given that Business of the old company is taken over

means take over the Assets as well as Liabilities. Unamortized Preliminary expenses is Other Non Current

Assets. Accounting for Amalgamation is governed by As-14 Goodwill on Amalgamation is to be written off in maximum 5

years. The Books of Old co. will be closed in the same manner

irrespective of whether amalgamation in the nature of merger or Purchase

Payment made to Preference Shareholder for the arrear of dividend in old company shall also be added to the PC by Net Payment Method.

In case of payment of Preliminary expenses in new company, Alternatively Goodwill A/c can be Debited instead of Profit & Loss A/c.

If in adjustment it is given that Old company declares dividend before amalgamation, then to that extent cash should be shown as Opening Balance in cash A/c.

THANK YOU

-By Prof. Vaibhav Pancholi