Sunday, April 19, 2015

Amalgamation and External Reconstruction

Amalgamation: Introduction
Amalgamation means the merging of two or more than two companies for eliminating competition among them or for growing in size to achieve the economies of scale. Amalgamation is a broad term which includes mergers (uniting of two existing companies) and acquisition (one company buying out another company).
There are two types of amalgamation: According to AS-14 amalgamation is divided into the following two categories for accounting purposes: 
(A) Amalgamation in the nature of merger; and 
(B) Amalgamation in the nature of purchase.
Objectives of amalgamation of companies: The following are the main objectives of amalgamation of companies:
(a) To avoid competition: The main purpose of amalgamation of   companies is to avoid competition among themselves. This will give the company an edge over its competitors.
(b)  To reduce cost: The amalgamated company can derive the operating cost advantage through lowering the cost of production. This is possible because of ‘economies of large scale’.
(c) To gain financially: The amalgamated company can derive financial gain which may be in the form of tax advantage, higher credit worthiness and lower rate of borrowing.
(d)  To achieve growth: The amalgamated company can pool its resources to facilitate internal growth and to prevent the advent of a new competitor. 
(e) To diversify the activities: The risk of a company can be lowered by diversifying its activities into two or more industries. At times, amalgamation may act as hedging the weak operation with a stronger one.

 Differences between amalgamation and external reconstruction
1. Amalgamation of companies involves liquidation of two or more companies, while external reconstruction involves liquidation of only one company,
2.  Amalgamation of companies results in combination of companies, but external reconstruction does not result in any such combination.

Differences between absorption and external reconstruction
1. Absorption of companies does not involve formation of a new company; however, external reconstruction involves formation of a new company,
2.  Absorption of companies results in liquidation of one or more companies while external reconstruction results in liquidation of only one company.
3. Absorption of companies involves combination of companies, whereas external reconstruction does not involve any combination.

Types of Amalgamation and their difference
According to AS – 14, Amalgamation is of two types:
a.       Amalgamation in the nature of merger
b.      Amalgamation in the nature of purchase
Amalgamation in the nature of Merger
According to AS-14 on Accounting for Amalgamation, the following conditions must be satisfied for an amalgamation in the nature of merger:
a. After amalgamation, all the assets and liabilities of the transferor company becomes the assets and liabilities of the transferee company.
b. Shareholders holding not less than 90% of the face value of the equity shares of the transferor company become the equity shareholders of the transferee company by virtue of amalgamation.
c. The business of the transferor company is intended to be carried on after the amalgamation by the transferee company.
d. Purchase consideration should be discharged only by issue of equity shares in the transferee company except that cash may be paid in respect of any fractional shares.
e. No adjustments are required to be made in the book values of the assets and liabilities of the transferor company, when they are incorporated in the financial statements of the transferee company. If any one of the condition is not satisfied in a process of amalgamation, it will not be considered as amalgamation in the nature of merger.
Amalgamation in the nature of Purchase: An amalgamation will be treated as “Amalgamation in the nature of purchase” if any of the above mentioned conditions is not satisfied.
Difference between Amalgamation in the nature of purchase and Amalgamation in the nature of merger
Basis of Distinction
Amalgamation in the Nature of Merger
Amalgamation in the Nature of Purchase
a)   Transfer of Assets and Liabilities
There is transfer of all assets & liabilities.
There need not be transfer for all assets & liabilities.
b)   Equity Shareholder’s holding 90%
Equity shareholders holding 90% equity shares in transferor company become shareholders of transferee company.
Equity shareholders need not become shareholders of transferee company.

c)    Purchase Consideration

Purchase consideration is discharged wholly by issue of equity shares (except cash for fractional shares)
Purchase consideration need not be discharged wholly by issue of equity shares.
d)   Same Business

The same business of the transferor company is intended to be carried on by the transferee company.
The business of the transferor company need not be intended to be carried on by the transferee company.
e)   Recording of Assets & Liabilities

The assets & liabilities taken over are recorded at their existing carrying amounts except where adjustment is required to ensure uniformity of accounting policies.
The assets & liabilities taken over are recorded at their existing carrying amounts or the basis of their fair values.

f)    Recording of Reserves of Transferor Co.

All reserves are recorded at their existing carrying amounts and in the same form.
Only statutory reserves are recorded at their existing carrying amounts.
g)   Recording of Balance of Profit & Loss A/c of Transferor

The balance of P&L A/c should be aggregated with the corresponding balance of the transferee co. or transferred to the General.
The balance of P&L A/c losses its identity and is not recorded at all.


Purchase Consideration – Methods for calculation
Purchase Consideration refers to the consideration payable by the purchasing company to the vendor company for taking over the assets and liabilities of Vendor Company.
Accounting Standard – 14 defines the term purchase consideration as the “aggregate of the shares and other securities issued and the payment made in the form of ach or other assets by the transferee company to the shareholders of the transferor company”. Although, purchase consideration refers to total payment made by purchasing company to the shareholders of Vendor Company, its calculation could be in different methods, as explained below:
a. Lump sum method
b. Net Assets method
c. Net Payment Method
a. Lump sum Method: Under this method purchase consideration will be paid in lump sum as per the valuation of purchasing companies valuation. E.g., if it is stated that A Ltd. takes over the business of B Ltd. for Rs.15, 00,000 here the sum of the Rs.15, 00,000 is the Purchase Consideration.
b. Net Assets Method: Under this method P.C. shall be computed as follows:
Particulars
Rs.
Agreed value of assets taken over
Less: Agreed value of Liabilities taken over
XXX
XXX
Purchase Consideration
XXX
Note:
                i. The term “agreed value” means the amount at which the transferor company has agreed to sell and the transferee company has agreed to take over a particular assets or a liability Otherwise book value will be the agreed value.
ii. Fictitious assets (i.e., preliminary expenses, underwriting commission, discount on issue of shares, discount on issue of debentures and debit balance in P & L A/c) are not taken over.

c. Net Payment Method: Under this method P.C. should be calculated by aggregating total payments made by the purchasing company. E.g.: A Ltd. had taken over B Ltd. and for that it agreed to pay Rs.5, 00,000 in cash 4, 00,000 Equity Shares of Rs.10 each fully paid at an agreed value of Rs.15 per share then the P.C. will be ascertained as follows:
Particulars
Rs.
Cash
4,00,000 E. Shares of Rs.10 each fully paid, at Rs.15 per share
5,00,000
60,00,000
Purchase Consideration
65,00,000

Methods of accounting for amalgamation of Companies
a.       Pooling of interest method
b.      Purchase method
Difference between Pooling of interest and purchase method of recording transactions relating to amalgamation.
Basis
Pooling of Interest Method
Purchase Method
a)   Applicability
The pooling of interest method is applied in case of an amalgamation in the nature of merger.
Purchase method is applied in the case of an amalgamation in the nature of purchase.

b)   Recording
In the pooling of interest method all the reserves of the transferor Co. are also recorded by the transferee Co. in its books of account.
In the purchase method the transferee Co. records in its books of accounts only the assets and liabilities taken over the reserves, except the statutory reserves of the transferor company are not aggregated with those of the transferee Co.
c)    Adjustment of the differences

Under the pooling of interest method, the difference between the consideration paid and the share capital of the transferor company is adjusted in the general reserve or other reserves of the transferee company.
Under the purchase method, the difference between the consideration and net assets taken over is treated by the transferee company as goodwill or capital reserve.

d)   Statutory reserves

In this method, the statutory reserves are recorded by the transferee co. like all other
reserves without opening Amalgamation and Adjustment A/c.
In the purchase method, while incorporating the statutory reserves, the transferee Co. has to open amalgamation adjustment account debiting it with the amt. of the statutory reserves being incorporated.

Labels

Absorption Costing (1) Accountancy (4) accounting for partnership firms (3) Accounting for Share Capital (3) accounts of non trading concern (3) advanced financial accounting (13) AHSEC (90) ahsec 11 (46) ahsec 12 (60) ahsec notes (89) AHSEC Question Papers (27) Assam Slet (10) bcfm (11) bills of exchange (6) branch accounting (3) Budgetary Control (3) Budgetary Control Notes (2) business communication (29) Business Environment Notes (7) business regulatory framewrok (47) Business Statistics Notes (23) cash flow statement (5) cbse 12 (19) cbse notes (27) commerce (13) company law (23) corporate accounting (33) corporate laws (14) cost accounting (62) cost and management accounting (34) cpt (36) cpt 200 (7) cpt notes (30) dibrugarh university (897) dibrugarh university notes (502) dibrugarh university question paper (288) dibrugarh university solved papers (197) dibrugarh university syllabus (47) direct tax law (49) eco - 01 (4) ECO - 02 (2) ECO - 03 (2) ECO - 05 (6) ECO - 06 (1) ECO - 07 (1) eco - 08 (4) eco - 09 (1) ECO - 10 (2) ECO - 11 (3) ECO - 12 (7) ECO - 13 (2) ECO - 14 (4) entrepreneurship (14) fianancial accounting (3) financial accounting (48) Financial Accounting Notes (11) financial management (18) Financial statements analysis (10) funds flow statement (3) guwahati university (305) guwahati university syllabus (54) Hire Purchase (5) Human Resource Management (14) icwai (38) icwai notes (39) ignou solved assignments (57) ignou solved question papers (63) income from house property (5) income from salary (4) Income Under the head Salaries (11) information technology (10) Installment Purchase (4) issue of shares (4) kkhsou (13) M.com (63) Management Accounting Notes (25) MCQ (11) paper I (1) paper II (9) paper III (1) principle of business mangement (16) Principles of Marketing Notes (16) royalty accounts (3) sale of goods act (8) semester I (157) Semester II (135) semester III (64) semester IV (122) semester V (101) semester VI (66) slet (13) Slet Ne (10) Small Business Management (5) solved assignments (22) UGC - NET: Commerce (08) (14) UGC - NET: Commerce (08) Paper II (3) UGC - NET: Commerce (08) Paper III (14) ugcnet solved question papers (23) Variance Analysis Notes (1)