Presentation on Accounting for Amalgamation of Companies

1. Amalgamation of Companies
M. C. Sharma
Associate Professor, Deptt. Of Commerce
Shaheed Bhagat Singh Evening College
(University of Delhi), Delhi
M: 9717415641;
Email:m_c_sharma@yahoo.com

2. Traditional Concepts
 Amalgamation: When two existing
companies are liquidated and a new Co. is
formed to purchase them.
Example: A Ltd. & B Ltd. are liquidated and
AB Ltd. is formed to purchase them.
 Absorption: When an existing company is
purchased another existing company.
Example: A Ltd. is liquidated and an existing
company B Ltd. purchases it.
Prof. M. C. Sharma M: 9717415641 2

3. Reconstruction
 Reconstruction of an existing loss making
company is done through a
reconstruction scheme to revive it. It is
two types:
 External Reconstruction: When an
existing loss making is liquidated and a
new company is formed to purchase it.
Example: ABC Ltd. Is liquidated and
ABC (2013) Ltd. is formed to purchase it.
Prof. M. C. Sharma M: 9717415641 3

4. Internal Reconstruction
 When an existing loss making company is
restructured through reduction in capital to
revive it. Under the scheme of
reconstruction, sacrifice is made by
shareholders, debentureholders and
creditors to write off accumulated losses,
fictitious assets and overvalued assets.
Prof. M. C. Sharma M: 9717415641 4

5. AS – 14:
Amalgamation of Companies
 As per AS-14, for the purpose of
accounting, there are two types of
amalgamation:
1. Amalgamation in the nature of merger
2. Amalgamation in the nature of purchase
Prof. M. C. Sharma M: 9717415641 5

6. Amalgamation in the nature of Merger
- Conditions
1. Assets and Liabilities: All the assets and
liabilities of the transferor (vendor) company
become the assets and liabilities of the
transferee (purchasing) company.
2. Equity Share Capital: Shareholders holding
at least 90% or more of the face value of
equity shares of the vendor company
become equity Shareholders of the
transferee (purchasing) company.
Prof. M. C. Sharma M: 9717415641 6

7. Amalgamation in the nature of merger
- Conditions
3. Purchase consideration: Purchase
consideration due to the Shareholders of the
transferor (vendor) company is discharged by
the transferee company wholly by the issue
of equity shares (except that cash may be
paid in respect of fractional shares or
payment to dissenting shareholders).
Prof. M. C. Sharma M: 9717415641 7

8. Amalgamation in the nature of merger
- Conditions
4. Business: The business of the transferor
(vendor) company is intended to be carried
on by the purchasing company.
5. Book Values: No adjustment is to be made
to the book values of assets (by revaluation
or otherwise) of the vendor company when
they are incorporated in the financial
statements of the purchasing company.
Prof. M. C. Sharma M: 9717415641 8

9. Amalgamation in the nature of Purchase
If any of the five conditions applicable to
amalgamation in the nature of merger is not
satisfied, it will be considered “Amalgamation
in the nature of Purchase”
Prof. M. C. Sharma M: 9717415641 9

10. Some Technical Terms
 Business: Taking over the business means
taking all the assets and all liabilities.
 All Assets: The term ‘all assets’ includes all
assets including cash, bank, goodwill, but
excluding fictitious assets.
 Liabilities: The term ‘Liabilities’ is wider term
and include all outside liabilities (payable to
third parties).
Prof. M. C. Sharma M: 9717415641 10

11. Purchase Consideration
As per AS-14, “Purchase consideration is the
aggregate of shares and other securities issued and
the payment made in the form of cash or other
assets by the transferee company to the
shareholders of the transferor company.”
It means any payment made by the transferee
company for the denture holders or creditors or any
other outside liabilities of the transferor company
shall not be included in the purchase consideration.
Prof. M. C. Sharma M: 9717415641 11

12. Calculation of Purchase Consideration
 Lump-sum payment method: The amount
of purchase consideration is given.
 Net assets method
 Purchase consideration = Value of assets taken
over – Value of liabilities undertaken
 Value of assets shall be taken at (a) agreed value
of asset (if given), otherwise (b) book value of
assets.
Prof. M. C. Sharma M: 9717415641 12

13. Calculation of Purchase Consideration
 Net Payment Method
Rs.
(a) Amount of Equity Shares
(No. of shares X Issue Price) x x
(b) Amount of Preference Shares
(No. of shares X Issue Price) x x
(c) Amount of Debentures
(No. of debentures X Issue Price) x x
(d) Cash paid for dissenting shareholders or
fractional shares x x
Purchase Consideration (Total) x x
Prof. M. C. Sharma M: 9717415641 13

14.  Exchange Method or Swap Method
 Under this method, the purchase consideration is paid by
the transferee company to the shareholders of the
transferor company in the form of shares. No. of shares are
calculated on the basis of exchange ratio between the
shares of the transferor company and transferee company.
It is usually based on the intrinsic value of the shares of the
companies.
 Example: A Ltd. Purchases B Ltd. And agrees to issue 2
equity shares of Rs. 10 each for every 3 shares of B Ltd.
Equity Share Capital of B Ltd. Consists of 1,50,000 shares
of Rs. 10 each.
 No. of shares issued = 1,50,000* 2/3 = 1,00,000 shares.
 Purchase Consideration = 1,00,000 x 10 = Rs. 10,00,000
Prof. M. C. Sharma M: 9717415641 14

15.  1,50,000 X 15 = Rs. 22,50,000
 No. of shares to be issued = 22,50,000/25
 = 90,000
Prof. M. C. Sharma M: 9717415641 15

16. Books of the Transferor Company
(1) Transfer of assets to the Realisation Account
Realisation Account Dr. [With the total]
To Sundry (individual) Assets A/cs
[With their respective book values]
Notes:
(i) The assets are transferred to Realisation A/c at
their gross book values. Provisions, if any, are
transferred to the Credit side of Realisation A/c.
Prof. M. C. Sharma M: 9717415641 16

17. (ii) Factitious assets like Preliminary
expenses, discount on the issue of the
shares/debentures, underwriting
commission, Dr. balance of Profit and
Loss Account, etc. are never transferred
to Realisation A/c.
(iii) Cash in hand and cash at bank are
transferred to the Realisation A/c only
when these are taken over by the
transferee company.
(iv) Goodwill and other intangible assets
like trademarks, patent rights etc., are also
transferred to Realisation A/c.
Prof. M. C. Sharma M: 9717415641 17

18. (2) Transfer of outside liabilities to the Realisation A/c
Sundry (Individual) Liabilities A/c Dr.
To Realisation A/c
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Notes:
Accumulated or undistributed profits (i.e. credit
balance in the Profit and Loss A/c), general reserve,
capital reserve and other reserves in the form of profits
are not transferred.
(3) On purchase consideration becoming due
Transferee Company’s A/c Dr.
To Realisation Account
(4) On sale of assets not taken over by the transferee
company
Bank Account Dr.
To Realisation A/c

19. (5) On payment of a liability not taken over by the
transferee company
Realisation A/c Dr.
Prof. M. C. Sharma M: 9717415641 19
To Bank A/c
(6) For Premium or Discount on Redemption of
Preference Shares:
(i) For premium
Realisation Account Dr.
To Preference Shareholders’ Account
(ii) For discount
Preference Shareholders’ Account Dr.
To Realisation Account

20. (6) For Redemption of Preference Shares:
(i) At premium
Pref. Share Capital A/c Dr.
Realisation A/c (Prem. On Red.) Dr.
To Preference Shareholders’ Account
(ii) At discount
Pref. Share Capital A/c Dr.
To Preference Shareholders’ A/c
To Realisation A/c (Discount on Red.)
Prof. M. C. Sharma M: 9717415641 20

21. (7) For liquidation expenses
(i) When the liquidation expenses are paid
by the transferor company itself:
Realisation Account Dr.
To Bank A/c
(ii) When the liquidation expenses are paid
by the transferee company,
No Entry
Prof. M. C. Sharma M: 9717415641 21

22. (8) For profit or loss on realisation: the accounting
treatment is as under:
(i) For profit
Realization A/c Dr.
To Equity Shareholders’ A/c
Prof. M. C. Sharma M: 9717415641 22
(ii) For loss
Equity Shareholders’ A/c Dr.
To Realisation Account
(9) On receiving the purchase consideration
Bank Account Dr.
Shares in Transferee Co. Dr.
Debentures in Transferee Co. Dr.
To Transferee Company’s Account

23. (11) For redemption of Preference Share Capital, if any
(i) Preference Share Capital A/c Dr.
* Premium on Redemption A/c Dr.
To Preference Shareholders’ Account
*To Discount on Redemption A/c
(ii) Preference Shareholders’ A/c Dr.
To Bank A/c
To Preference Shares in Transferee Co.
To Equity Shares in Transferee Co.
To Debentures in Transferee Co.
Prof. M. C. Sharma M: 9717415641 23

24. (12) Transfer of Equity Share Capital,
Accumulated profits & Reserves to
Equity Shareholders’ A/c.
Equity Share Capital A/c Dr.
General Reserve A/c Dr.
Reserve Fund A/c Dr.
Capital Reserve A/c Dr.
P & L Appropriation (Surplus) A/c Dr.
To Equity Shareholders’ A/c
Prof. M. C. Sharma M: 9717415641 24

25. (13) Transfer of accumulated losses to Equity
Shareholders’ A/c.
Equity Shareholders’ A/c Dr.
To P & L Appropriation (Surplus) A/c
To Discount on Issue of Shares/Debentures A/c
To Preliminary Expenses A/c
To Share Issue Expenses A/c
To Underwriting Commission A/c
(14) On payment to Equity Shareholders
Equity Shareholders’ Account Dr.
To Equity Shares in Transferee Co.
To Preference Shares in transferee Co.
To Debentures in Transferee Co.
To Bank Account
Prof. M. C. Sharma M: 9717415641 25

26. Ledger Accounts in The Books of
Transferor Co.
 Realisation A/c
 Transferee Company’s A/c
 Equity Shareholders’ A/c
 Equity Shares in Transferee Company’s A/c
Prof. M. C. Sharma M: 9717415641 26

27. Books of Transferee Company –
Purchase Method (Amalgamation in the nature
of Purchase)
1. For purchase consideration due
Business Purchase Account Dr.
To Liquidators of the Transferor Co.
PC
PC
2. For recording assets and liabilities
taken over
Sundry Assets (Individual) A/c Dr.
* Goodwill A/c Dr.
To Sundry Liabilities (Individual )
To Business Purchase Account
* To Capital Reserve A/c
B/F
PC
B/F
Prof. M. C. Sharma M: 9717415641 27

28. Prof. M. C. Sharma M: 9717415641 28
 Notes:
 Assets and Liabilities acquired are
recorded are recorded at ‘agreed value’
otherwise at book value.
 If purchase consideration is more than net
assets, then the difference shall be debited to
Goodwill A/c.
 If purchase consideration less than net assets,
then the difference shall be credited to Capital
Reserve A/c.

29. 1. For payment of purchase
consideration
Liquidators of the Transferor Co. Dr.
To Equity Share Capital A/c
To Pref. Share Capital A/c
To Debentures A/c
To Bank A/c
PC
Prof. M. C. Sharma M: 9717415641 29
Note:
1. If Shares/Debentures are issued at
discount, ‘Discount on Issue of Shares/
Debentures A/c’ shall be debited.
2. If Shares/Debentures are issued at
Premium, ‘Securities Premium A/c’ shall
be credited.

30. 4. When statutory reserves such as
Development Rebate Reserve, Investment
Allowance Reserve etc. are maintained.
Amalgamation Adjustment A/c Dr.
To Development Rebate Reserve A/c
To Investment Allowance Reserve A/c
Prof. M. C. Sharma M: 9717415641 30
Note:
1. When these reserves are not required,
the above entry is reversed.

31. 5. When liquidation expenses of the transferor
company are borne by the transferee
company, following entry is passed:
Goodwill Account Dr.
To Bank Account
6. If a transferee company is newly
formed, for the payment of company
formation expenses:
Preliminary Expenses A/c Dr.
To Bank Account
Prof. M. C. Sharma M: 9717415641 31

32. 7. In case, there are both Goodwill and
Capital Reserve Account, Goodwill
should be written off by debiting to
capital reserve. (amount – lower of the
two)
Capital Reserve Dr.
To Goodwill Account
8. On payment of a liability by the transferee
company
Liability Account Dr.
To Share Capital Account
To Debentures Account
To Bank Account
Prof. M. C. Sharma M: 9717415641 32

33. Books of Transferee Company –
Purchase Method (Amalgamation in the nature
of Merger)
1. For purchase consideration due
Business Purchase Account Dr.
To Liquidator of the Transferor Co.
PC
PC
2. For recording assets, liabilities,
Reserves and Surplus
Sundry Assets (Individual) A/c Dr.
To Sundry Liabilities (Individual )
To Business Purchase Account
To ………….. Reserve A/c
To Profit and Loss A/c (Surplus)
Prof. M. C. Sharma M: 9717415641 33

34. Prof. M. C. Sharma M: 9717415641 34
 Notes:
 Assets and Liabilities acquired are
recorded are recorded at ‘agreed value’
otherwise at book value.
 If purchase consideration is more than net
assets, then the difference shall be debited to
Goodwill A/c.
 If purchase consideration less than net assets,
then the difference shall be credited to Capital
Reserve A/c.

35. (8) For profit or loss on realisation: the accounting
treatment is as under:
(i) For profit
Realization Account Dr.
To Equity Shareholders Account
Prof. M. C. Sharma M: 9717415641 35
(ii) For loss
Equity Shareholders Account Dr.
To Realisation Account
(9) On receiving the purchase consideration
Bank Account Dr.
Shares in Transferee Co. Dr.
Debentures in Transferee Co. Dr.
To Transferee Company’s Account

36. (11) For redemption of Preference Share Capital, if any
(i) Preference Share Capital A/c Dr.
* Premium on Redemption A/c Dr.
To Preference Shareholders Account
To Discount on Redemption A/c
(ii) Preference Shareholders Account Dr.
To Bank Account
To Preference Shares in Transferee Co.
To Equity Shares in Transferee Co.
To Debentures in Transferee Co.
To Bank A/c
Prof. M. C. Sharma M: 9717415641 36

37. (12) Transfer of Equity Share Capital,
Accumulated profits & Reserves to
Equity Shareholders’ A/c.
Equity Share Capital and the accumulated
profits and reserves are transferred to Equity
Shareholders’ A/c:
Equity Share Capital A/c Dr.
General Reserve A/c Dr.
Reserve Fund A/c Dr.
Capital Reserve A/c Dr.
P & L Appropriation (Surplus) A/c Dr.
To Equity Shareholders’ A/c
Prof. M. C. Sharma M: 9717415641 37

38. (13) Transfer of accumulated losses to Equity
Shareholders’ A/c.
Equity Shareholders’ A/c Dr.
To P & L Appropriation (Surplus) A/c
To Discount on Issue of Shares/Debentures A/c
To Preliminary Expenses A/c
To Share Issue Expenses A/c
To Underwriting Commission A/c
(14) On payment to Equity Shareholders
Equity Shareholders Account Dr.
To Equity Shares in Transferee Co.
To Debentures in Transferee Co.
To Bank Account
Prof. M. C. Sharma M: 9717415641 38

39. Books of Transferee Company –
Purchase Method (Amalgamation in the nature
of Purchase)
1. For purchase consideration due
Business Purchase Account Dr.
To Liquidator of the Transferor
Prof. M. C. Sharma M: 9717415641 39
Co.
PC
PC
2. For recording assets and liabilities
taken over
Sundry Assets (Individual) A/c Dr.
* Goodwill A/c Dr.
To Sundry Liabilities (Individual )
To Business Purchase Account
* To Capital Reserve A/c
B/F
PC
B/F

40. Prof. M. C. Sharma M: 9717415641 40
 Notes:
 Assets and Liabilities acquired are
recorded are recorded at ‘agreed value’
otherwise at book value.
 If purchase consideration is more than net
assets, then the difference shall be debited to
Goodwill A/c.
 If purchase consideration less than net assets,
then the difference shall be credited to Capital
Reserve A/c.

41. 1. For payment of purchase
consideration
Liquidator of the Transferor Co. Dr.
To Equity Share Capital A/c
To Pref. Share Capital A/c
To Debentures A/c
To Bank A/c
PC
Prof. M. C. Sharma M: 9717415641 41
Note:
1. If Shares/Debentures are issued at
discount, ‘Discount on Issue of Shares/
Debentures A/c’ shall be debited.
2. If Shares/Debentures are issued at
Premium, ‘Securities Premium A/c’ shall
be credited.

42. 4. When statutory reserves such as
Development Rebate Reserve, Investment
Allowance Reserve etc. are maintained.
Amalgamation Adjustment A/c Dr.
To Development Rebate Reserve A/c
To Investment Allowance Reserve A/c
Prof. M. C. Sharma M: 9717415641 42
Note:
1. When these reserve are not required,
the above entry is reversed.

43. 5. When liquidation expenses of the transferor
company are borne by the transferee
company, following entry is passed:
Goodwill Account Dr.
To Bank Account
6. If a transferee company is newly
formed, for the payment of company
formation expenses:
Preliminary Expenses A/c Dr.
To Bank Account
Prof. M. C. Sharma M: 9717415641 43

44. 7. In case, there are both Goodwill and
Capital Reserve Account, Goodwill
should be written off by debiting to
capital reserve.
Capital Reserve Dr.
To Goodwill Account
8. On payment of a liability by the transferee
company
Liability Account Dr.
To Share Capital Account
To Debentures Account
To Bank Account
Prof. M. C. Sharma M: 9717415641 44

45. Books of Transferee Company –
Purchase Method (Amalgamation in the nature
of Merger)
1. For purchase consideration due
Business Purchase Account Dr.
To Liquidator of the Transferor Co.
PC
PC
2. For recording assets, liabilities,
Reserves and Surplus
Sundry Assets (Individual) A/c Dr.
To Sundry Liabilities (Individual )
To Business Purchase Account
To ………….. Reserve A/c
To Profit and Loss A/c (Surplus)
Prof. M. C. Sharma M: 9717415641 45

46. Prof. M. C. Sharma M: 9717415641 46
 Notes:
 Assets and Liabilities acquired are
recorded are recorded at book value.
 If purchase consideration is more than the
Share Capital of the Transferor Co., the
difference being Capital Loss shall be first
adjusted against Capital Reserve, then against
the Revenue Reserve of the Transferor Co.
 If purchase consideration less than the
Share Capital of the Transferor Co., the
difference being Capital Profit, shall be
credited to Capital Reserve A/c.

47. 1. For payment of purchase
consideration
Liquidator of the Transferor Co. Dr.
To Equity Share Capital A/c
To Pref. Share Capital A/c
To Debentures A/c
To Bank A/c
PC
Prof. M. C. Sharma M: 9717415641 47
Note:
1. If Shares/Debentures are issued at
discount, ‘Discount on Issue of Shares/
Debentures A/c’ shall be debited.
2. If Shares/Debentures are issued at
Premium, ‘Securities Premium A/c’ shall
be credited.

48. 5. When liquidation expenses of the transferor
company are borne by the transferee
company, following entry is passed:
Goodwill Account Dr.
To Bank Account
6. If a transferee company is newly
formed, for the payment of company
formation expenses:
Preliminary Expenses A/c Dr.
To Bank Account
Prof. M. C. Sharma M: 9717415641 48

49. 7. In case, there are both Goodwill and
Capital Reserve Account, Goodwill
should be written off by debiting to
capital reserve.
Capital Reserve Dr.
To Goodwill Account
8. On payment of a liability by the transferee
company
Liability Account Dr.
To Share Capital Account
To Debentures Account
To Bank Account
Prof. M. C. Sharma M: 9717415641 49