Amalgamation

Amalgamation

Forms of AmalgamationMotive for AmalgamationProceduresAccounting for Amalgamation

Forms of Amalgamation MergerMerger Acquisition or Takeovers (more than 15% Acquisition or Takeovers (more than 15%

intending to control)intending to control) Friendly Takeover Friendly Takeover Hostile TakeoverHostile TakeoverAmalgamation may take form of Amalgamation may take form of Horizontal: Between companies in the same Horizontal: Between companies in the same

line of businessline of business Vertical: Between company and suppliers or Vertical: Between company and suppliers or

customerscustomers Conglomerate: Between Un-relatedsConglomerate: Between Un-relateds

Motive for Amalgamation

Synergy(2 + 2 = 5)Synergy(2 + 2 = 5) Economies of ScaleEconomies of Scale Financial EconomiesFinancial Economies GrowthGrowth DiversificationDiversification Managerial EfficienciesManagerial Efficiencies Tax benefitsTax benefits

http://www.livemint.com/SectionPages/Mergers-http://www.livemint.com/SectionPages/Mergers-Acquisitions.aspx?NavId=3&NavsId=21Acquisitions.aspx?NavId=3&NavsId=21

Procedure of Amalgamation

BOD works out terms of Amalgamation.BOD works out terms of Amalgamation. A scheme of Amalgamation is prepared and A scheme of Amalgamation is prepared and

submitted for approval of respective High Courts.submitted for approval of respective High Courts. Shareholders approve the terms of Shareholders approve the terms of

Amalgamation.Amalgamation. Approval of SEBI is obtained.Approval of SEBI is obtained. A new company is formed where necessary to A new company is formed where necessary to

issue its own shares to shareholders of transferor issue its own shares to shareholders of transferor company.company.

The transferor companies are liquidated and all The transferor companies are liquidated and all assets and liabilities are taken over by transferee assets and liabilities are taken over by transferee company.company.

Accounting for Amalgamation

ICAI has issued AS-14, ‘Accounting for ICAI has issued AS-14, ‘Accounting for Amalgamation which states the procedures for Amalgamation which states the procedures for accounting for Amalgamations’. This is accounting for Amalgamations’. This is mandatory and effective from 1.4.1995.mandatory and effective from 1.4.1995.

The following terms may be considered.The following terms may be considered. Transferor Company: Transferor Company: The company which is The company which is

amalgamated into another companyamalgamated into another company.. Transferee Company: Transferee Company: The company into which a The company into which a

transferor company is amalgamated.transferor company is amalgamated. Reserves: Reserves: A portion of earnings, receipts and A portion of earnings, receipts and

other surplus of an enterprise.other surplus of an enterprise.

Types of Amalgamation AS-14 recognizes two types of AS-14 recognizes two types of

Amalgamation.Amalgamation.

Amalgamation in the nature of Amalgamation in the nature of MergerMerger

Amalgamation in the nature of Amalgamation in the nature of PurchasePurchase

Amalgamation in the nature of Merger

An amalgamation will be treated as “Amalgamation in the nature of Merger” only if all the following five conditions are satisfied [paragraph 3(e)].

(i) All the assets and liabilities of the transferor company become, after amalgamation, the assets and liabilities of the transferee company.

(ii) Shareholders holding not less than 90%of the face value of the 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 or their nominees) become equity shareholders of the transferee company by virtue of the amalgamation.

Amalgamation in the nature of Merger

(iii) 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.

(iv) The business of the transferor company is intended to be carried on, after the amalgamation, by the transferee company.

(v) 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.

Amalgamation in the nature of Purchase

‘Amalgamation in the nature of purchase’ is an amalgamation which does not satisfy any one or more of the conditions specified above.

Consideration for the amalgamation means the aggregate of the 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.

Methods of Accounting for Amalgamations

There are two main methods of accounting for amalgamations:(a) the pooling of interests method; and(b) the purchase method.

The use of the pooling of interests method is confined to circumstances which meet the criteria referred to in paragraph 3(e) for an amalgamation in the nature of merger.

The object of the purchase method is to account for the amalgamation by applying the same principles as are applied in the normal purchase of assets. This method is used in accounting for amalgamations in the nature of purchase.

The Pooling of Interests Method

Under the pooling of interests method, the assets, liabilities and reserves of the transferor company are recorded by the transferee company at their existing carrying amounts .

If, at the time of the amalgamation, the transferor and the transferee companies have conflicting accounting policies, a uniform set of accounting policies is adopted following the amalgamation.

The effects on the financial statements of any changes in accounting policies are reported in accordance with Accounting Standard (AS) 5, ‘Prior Period and Extraordinary Items and Changes in Accounting Policies’.

The Purchase Method

Under the purchase method, the transferee company accounts for the amalgamation either by incorporating the assets and liabilities at their existing carrying amounts or by allocating the consideration to individual identifiable assets and liabilities of the transferor company on the basis of their fair values at the date of amalgamation.

The identifiable assets and liabilities may include assets and liabilities not recorded in the financial statements of the transferor company.

The Purchase Method

Where assets and liabilities are restated on the basis of their fair values, the determination of fair values may be influenced by the intentions of the transferee company.

For example, the transferee company may have a specialised use for an asset, which is not available to other potential buyers.

The transferee company may intend to effect changes in the activities of the transferor company which necessitate the creation of specific provisions for the expected costs, e.g. planned employee termination and plant relocation costs.

Disclosure

For all amalgamations, the following disclosures are considered appropriate in the first financial statements following the amalgamation:(a) names and general nature of business of the amalgamating companies;(b) effective date of amalgamation for accounting purposes; (c) the method of accounting used to reflect the amalgamation; and(d) particulars of the scheme sanctioned under a statute.

Disclosure

For amalgamations accounted for under the pooling of interests method, the following additional disclosures are considered appropriate in the first financial statements following the amalgamation:

(a) description and number of shares issued, together with the percentage of each company’s equity shares exchanged(swap ratio) to effect the amalgamation;

(b) the amount of any difference between the consideration and the value of net identifiable assets acquired, and the treatment thereof.

Disclosure

For amalgamations accounted for under the purchase method, the following additional disclosures are considered appropriate in the first financial statements following the amalgamation:(a) consideration for the amalgamation and a description of the consideration paid or contingently payable; and(b) the amount of any difference between the consideration and the value of net identifiable assets acquired, and the treatment thereof including the period of amortisation of any goodwill arising on amalgamation.


A. Pooling of Interests MethodA. Pooling of Interests Method Accounting Entries the books of Transferee Company:Accounting Entries the books of Transferee Company:

For Amalgamation of the business:For Amalgamation of the business:Business Purchase A/c………Dr.(Purchase Consideration )Business Purchase A/c………Dr.(Purchase Consideration )

To Liquidator of Transferor Co. A/cTo Liquidator of Transferor Co. A/c. .

For Taking over assets, liabilities and resources:For Taking over assets, liabilities and resources:Sundry Assets A/c………………Dr.(Book Value)Sundry Assets A/c………………Dr.(Book Value)To Sundry Liabilities A/c( Book Value)To Sundry Liabilities A/c( Book Value) To Reserves A/c(See Note)To Reserves A/c(See Note) To Profit & Loss A/cTo Profit & Loss A/c

To Business Purchase A/c(Purchase Consideration)To Business Purchase A/c(Purchase Consideration)Note:Note: After adjustment of differences in Issued Share Capital

and the amount of Paid up Share Capital.


Accounting Entries the books of Transferee Accounting Entries the books of Transferee Company:Company: For payment of Purchase Consideration:For payment of Purchase Consideration:

Liquidator of Transferor Co. A/c…………..Dr.Liquidator of Transferor Co. A/c…………..Dr.To Share Capital A/c(Issued)To Share Capital A/c(Issued)To Securities Premium A/c(Premium)To Securities Premium A/c(Premium)To Cash A/c(To fractional shareholders To Cash A/c(To fractional shareholders

who dissent)who dissent)To Non-cash Consideration A/c (To To Non-cash Consideration A/c (To

fractional shareholders who dissent)fractional shareholders who dissent)


Accounting Entries the books of Transferor Company:Accounting Entries the books of Transferor Company:The following steps are followed.The following steps are followed.

Prepare the balance sheet on the date of liquidation.Prepare the balance sheet on the date of liquidation. Open Realization A/c and transfer all assets and liabilities.Open Realization A/c and transfer all assets and liabilities. Calculate Purchase ConsiderationCalculate Purchase Consideration Credit Realization A/c by Purchase Consideration.Credit Realization A/c by Purchase Consideration. Calculate profit or loss on realization.Calculate profit or loss on realization. Transfer share capital, reserves and surplus to sundry Transfer share capital, reserves and surplus to sundry

shareholders A/c.shareholders A/c. Transfer profit or loss on realization to sundry shareholder’s A/c.Transfer profit or loss on realization to sundry shareholder’s A/c. Receive purchase consideration.Receive purchase consideration. Make payment to preference shareholders.Make payment to preference shareholders. Distribute shares of transferee company among existing SHsDistribute shares of transferee company among existing SHs


Accounting Entries the books of Transferor Company:Accounting Entries the books of Transferor Company: For transferring assets to Realization A/cFor transferring assets to Realization A/c

Realization A/c……………..Dr.Realization A/c……………..Dr.To Assets A/cTo Assets A/c

For transferring liabilities to Realization A/cFor transferring liabilities to Realization A/cLiabilities A/c……………….Dr.Liabilities A/c……………….Dr.To Realization A/cTo Realization A/c

For transferring equity share capital, reserve and surplus For transferring equity share capital, reserve and surplus Equity Share Capital A/c……Dr.Equity Share Capital A/c……Dr.General Reserves A/c……….Dr.General Reserves A/c……….Dr.Profit & Loss A/c……………...Dr.Profit & Loss A/c……………...Dr.To Sundry Shareholders A/cTo Sundry Shareholders A/c


Accounting Entries the books of Transferor Company:Accounting Entries the books of Transferor Company: For transferring preference share capitalFor transferring preference share capital

Preference Share Capital A/c……Dr.Preference Share Capital A/c……Dr.To Preference Shareholders A/cTo Preference Shareholders A/c

For purchase consideration due from transferee companyFor purchase consideration due from transferee companyTransferee Co. A/c…………………Dr.Transferee Co. A/c…………………Dr.To Realization A/cTo Realization A/c

On receiving purchase considerationOn receiving purchase considerationEquity Shares(Te Co.) A/c…………Dr.Equity Shares(Te Co.) A/c…………Dr.Preference Shares(Te. Co.) A/c…...Dr.Preference Shares(Te. Co.) A/c…...Dr.Debenture (Te. Co.) A/c…………….Dr.Debenture (Te. Co.) A/c…………….Dr.To Transferee Co. A/cTo Transferee Co. A/c


Accounting Entries the books of Transferor Company:Accounting Entries the books of Transferor Company: For Liquidation Expenses( Borne by Tr. Co.)For Liquidation Expenses( Borne by Tr. Co.)

Realization A/c………………………Dr.Realization A/c………………………Dr.To Bank A/cTo Bank A/c

(No entry if borne by Te. Co.)(No entry if borne by Te. Co.) For payment to pref. sh. holdersFor payment to pref. sh. holders

Pref. Sh. Holders A/c ……………….Dr.Pref. Sh. Holders A/c ……………….Dr.To Pref. Sh. In Te. Co. A/cTo Pref. Sh. In Te. Co. A/cTo Bank A/c ( If any)To Bank A/c ( If any)

For loss on RealizationFor loss on RealizationSundry Sh. Holders A/c………………Dr.Sundry Sh. Holders A/c………………Dr.Realization A/cRealization A/c


Accounting Entries the books of Transferor Accounting Entries the books of Transferor Company:Company: For profit on RealizationFor profit on Realization

Realization A/c………………………Dr.Realization A/c………………………Dr.To Sundry Sh. Holders A/cTo Sundry Sh. Holders A/c

For final payment to equity. sh. holdersFor final payment to equity. sh. holders Sundry Sh. Holders A/c ……………….Dr.Sundry Sh. Holders A/c ……………….Dr.

To Eq. Sh. In Te. Co. A/cTo Eq. Sh. In Te. Co. A/cTo Bank A/c ( If any)To Bank A/c ( If any)

After payment to equity shareholders all accounts in the After payment to equity shareholders all accounts in the books of the transferor company will be closed.books of the transferor company will be closed.

Q.8. B Ltd. was absorbed by A Ltd. and the Balance Sheet of B Ltd. as on 31.12.2010, is as follows.

The terms and conditions were: A Ltd. took all the liabilities and assets of B Ltd. at book value.A Ltd. issued 2 shares of Rs.8 each at a premium of Rs.5 per shares and Rs.3 in cash in exchange of 1 share of B Ltd.A Ltd. paid the cost of acquisition of Rs.2,000 in addition to purchase consideration.

Show journal entries in books of both the companies according to pooling of interests method.

Liabilities Amount Assets AmountEq. Sh.(Rs.10) Capital 1,00,000 Buildings 70,000 General Reserve 80,000 Investments 60,000 P & L App. A/c 10,000 P & M 60,000 Accident Insurance Fund 20,000 Stock 27,500 Dividend Equalization Fund

20,000 Debtors 50,000

Employee’s P F 20,000 Cash at Bank 10,000 Sundry Creditors 30,000 Preliminary Expenses 2,500 Total 2,80,000 Total 2,80,000

River Ltd. and Lake Ltd. merged together to form Sea Ltd. The following are balance sheets of those as on 31st March 2009.

On 1st April 2009, the two companies agreed to amalgamate. The purchase consideration was agreed at Rs. 3,50,000 and Rs. 1,40,000 for River Ltd. and Lake Ltd. respectively (a non cash exchange of 7 shares of Rs.10 at par in Sea Ltd. for every 5 shares). Give journal entries to close the books of River Ltd. and Lake Ltd. and also prepare the opening balance sheet of Sea Ltd.

Liabilities RiverLtd.

LakeLtd.

Assets RiverLtd.

Lake Ltd.

Equity Shares of Rs.10 each.

2,50,000 1,00,000 Plant & Machinery

2,30,000 1,10,000

10% Debentures 30,000 --- Stock 80,000 1,90,000

12% Debentures --- 2,00,000 Debtors 50,000 20,000

Profit & Loss A/c 30,000 50 ,000 Cash and Bank 70,000 60,000

Reserve 70,000 ---

Creditors 50,000 30,000

Total 4,30,000 3,80,000 Total 4,30,000 3,80,000

X Ltd. and Y Ltd. merged together to form Z Ltd. The following are balance sheets of those as on 31st March 2009.

On 1st April 2009, the two companies agreed to amalgamate. The purchase consideration was agreed at Rs. 1,20,000 and Rs. 60,000 for X Ltd. and Y Ltd. respectively . The entire PC was paid by fully paid shares. Debenture holders in X were issued debentures in Z for full amount and denomination. The authorized capital of Z Ltd. is 10,00,000 consisting of 1,00,000 equity shares of Rs.10 each. Give journal entries to close the books of X Ltd. and Y Ltd. and also prepare the opening balance sheet of Z Ltd.

Liabilities X Ltd. Y Ltd. Assets X Ltd. Y Ltd.Equity Shares of Rs.100 each.

1,00,000 60,000 Plant & Machinery

1,10,000 50,000

6% Debentures of Rs.10 each

20,000 --- Land & Buildings

30,000 ---

Dividend Equalization Fund

4,000 --- Stock 16,000 8,000

Profit & Loss A/c 2,000 --- Debtors 14,000 9,000Reserve 34,000 --- Cash and Bank 3,000 1,000Creditors 10,000 8,000Employee’s PF 3,000 ---Total 1,73,000 68,000 Total 1,73,000 68,000


B. Purchase MethodB. Purchase Method Accounting Entries the books of Transferee Company:Accounting Entries the books of Transferee Company:

For Amalgamation of the business:For Amalgamation of the business:Business Purchase A/c………Dr.(Purchase Consideration )Business Purchase A/c………Dr.(Purchase Consideration )

To Liquidator of Transferor Co. A/cTo Liquidator of Transferor Co. A/c. .

For Taking over assets and liabilities:For Taking over assets and liabilities:Sundry Assets A/c………………Dr.(Individually, Agreed Value)Sundry Assets A/c………………Dr.(Individually, Agreed Value)Goodwill A/c……………………..Dr.(Difference)Goodwill A/c……………………..Dr.(Difference)To Sundry Liabilities A/c (Agreed Value)To Sundry Liabilities A/c (Agreed Value)

To Business Purchase A/c (Purchase Consideration)To Business Purchase A/c (Purchase Consideration)To Capital Reserve A/c (Difference)To Capital Reserve A/c (Difference)


Accounting Entries the books of Transferee Company:Accounting Entries the books of Transferee Company: For payment of Purchase Consideration:For payment of Purchase Consideration:

Liquidator of Transferor Co. A/c…………..Dr.Liquidator of Transferor Co. A/c…………..Dr.To Share Capital A/c(Issued)To Share Capital A/c(Issued)To Securities Premium A/c(Premium)To Securities Premium A/c(Premium)To Bank A/c(If any)To Bank A/c(If any)To Non-cash Consideration A/c(If any)To Non-cash Consideration A/c(If any)

When Liquidation Expenses are incurred:When Liquidation Expenses are incurred:Goodwill A/c………………………………Dr.Goodwill A/c………………………………Dr.To BankTo Bank

When Formation Expenses are incurred: When Formation Expenses are incurred: Preliminary Expenses A/c…………….Dr.Preliminary Expenses A/c…………….Dr.To BankTo Bank


When there are both goodwill and capital reserve:When there are both goodwill and capital reserve:Capital Reserve……………...…………..Dr.Capital Reserve……………...…………..Dr.

To Goodwill To Goodwill When new Shares and Debentures are issued:When new Shares and Debentures are issued:

Bank A/c………………………………… Dr.Bank A/c………………………………… Dr.To Share Capital To Share Capital To DebenturesTo Debentures

Accounting for Amalgamation Accounting Entries the books of Transferor Company:Accounting Entries the books of Transferor Company:

For transferring assets to Realization A/cFor transferring assets to Realization A/cRealization A/c……………..Dr.Realization A/c……………..Dr.To Assets A/cTo Assets A/c

For transferring liabilities to Realization A/cFor transferring liabilities to Realization A/cLiabilities A/c……………….Dr.Liabilities A/c……………….Dr.To Realization A/cTo Realization A/c

For transferring equity share capital, reserve and surplus For transferring equity share capital, reserve and surplus Equity Share Capital A/c……Dr.Equity Share Capital A/c……Dr.General Reserves A/c……….Dr.General Reserves A/c……….Dr.Profit & Loss A/c……………...Dr.Profit & Loss A/c……………...Dr.To Sundry Shareholders A/cTo Sundry Shareholders A/c

Accounting for Amalgamation Accounting Entries the books of Transferor Company:Accounting Entries the books of Transferor Company:

For transferring preference share capitalFor transferring preference share capital Preference Share Capital A/c……Dr.Preference Share Capital A/c……Dr.To Preference Shareholders A/cTo Preference Shareholders A/c

For purchase consideration due from transferee companyFor purchase consideration due from transferee companyTransferee Co. A/c…………………Dr.Transferee Co. A/c…………………Dr.To Realization A/cTo Realization A/c

On receiving purchase considerationOn receiving purchase considerationEquity Shares(Te Co.) A/c…………Dr.Equity Shares(Te Co.) A/c…………Dr.Preference Shares(Te. Co.) A/c…...Dr.Preference Shares(Te. Co.) A/c…...Dr.Debenture (Te. Co.) A/c…………….Dr.Debenture (Te. Co.) A/c…………….Dr.To Transferee Co. A/cTo Transferee Co. A/c

Accounting for Amalgamation Accounting Entries the books of Transferor Accounting Entries the books of Transferor

Company:Company: For Liquidation Expenses( Borne by Tr. Co.)For Liquidation Expenses( Borne by Tr. Co.)

Realization A/c………………………Dr.Realization A/c………………………Dr.To Bank A/cTo Bank A/c

(No entry if borne by Te. Co.)(No entry if borne by Te. Co.) For Realization of Assets not taken over by Te. Co.For Realization of Assets not taken over by Te. Co.

Bank A/c………………………………Dr.Bank A/c………………………………Dr.To Realization A/cTo Realization A/c

For discharge of liabilities not taken over by Te. Co.For discharge of liabilities not taken over by Te. Co.Liabilities A/c………………………….Dr.Liabilities A/c………………………….Dr.To BankTo Bank


Accounting Entries the books of Transferor ccounting Entries the books of Transferor Company:Company:

For payment to preference shareholdersFor payment to preference shareholders Pref. Sh. Holders A/c ……………….Dr.Pref. Sh. Holders A/c ……………….Dr.

To Pref. Sh. In Te. Co. A/cTo Pref. Sh. In Te. Co. A/cTo Bank A/c ( If any)To Bank A/c ( If any)

For loss on RealizationFor loss on RealizationSundry Sh. Holders A/c………………Dr.Sundry Sh. Holders A/c………………Dr.

Realization A/cRealization A/c

Accounting for Amalgamation Accounting Entries the books of Transferor Accounting Entries the books of Transferor

Company:Company: For profit on RealizationFor profit on Realization

Realization A/c………………………Dr.Realization A/c………………………Dr.To Sundry Sh. Holders A/cTo Sundry Sh. Holders A/c

For final payment to equity. sh. holdersFor final payment to equity. sh. holders Sundry Sh. Holders A/c ……………….Dr.Sundry Sh. Holders A/c ……………….Dr.To Eq. Sh. In Te. Co. A/cTo Eq. Sh. In Te. Co. A/cTo Bank A/c ( If any)To Bank A/c ( If any)

After payment to equity shareholders all accounts in the After payment to equity shareholders all accounts in the books of the transferor company will be closed.books of the transferor company will be closed.

Q. B. Co. was absorbed by A. Co. on 31.12.09, the B/S of B, on that day was as follows.

The terms and conditions were: (a) A took all liabilities and assets except investments, which B, sold at Rs.55,000.(b) A issued 2 shares of Rs.8 each at a premium of Rs.5 per shares and Rs.3 in cash in

exchange of 1 share of B. (PC: Rs.2,90,000)(c) A paid the cost of acquisition of Rs.2,000 in addition to purchase consideration.

Show journal entries in the books of both the companies.

LIABILITIES Rs. ASSETS Rs.

Eq. Sh.(Rs.10) Capital 1,00,000 Buildings 70,000

General Reserve 80,000 Investments 60,000

P & L App. A/c 10,000 P & M 60,000

Accident Insurance Fund 20,000 Stock 27,500

Dividend Equalization Fund 20,000 Debtors 50,000

Employee’s P F 20,000 Cash at Bank 10,000

Sundry Creditors 30,000 Preliminary Expenses 2,500

Total 2,80,000 Total 2,80,000

Amalgamation

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