ACCOUNTING SOLUTIONS SCO: 209, First Floor, Sector-36/D. Chandigarh (M): 0172-4670390, 9876149390,9041394669 AMALGAMATION & EXTERNAL RECONTRUCTION Amalgamation When two or more existing companies go into liquidation and a new company is formed to make over their business, it is known as amalgamation .the institute of chartered accountants of India has issued accounting standard 14 (AS 14) on accounting for amalgamation, ’this standard is applicable in respect of accounting period commencing on or after 1st April 1995 and is mandatory in nature. This of any resultant goodwill or reserve. Types of Amalgamation From accounting view point, there are two types of amalgamation: a. Amalgamation in the nature of merger. b. Amalgamation in the nature of purchase. A. Amalgamation in the nature of merger An amalgamation should be considered in the nature of merger after fulfilling the following conditions: 1. All the assets and liabilities of the transferor company become the assets and liabilities of Transferee Company after amalgamation. 2. Shareholders holding not less than 90% of the face value of the equity share capital of the transferor company (other than equity shares already held therein. Immediately before the amalgamation. By the transferee company or its subsidiaries or their nominees) become the equity shareholders of the transferee by virtue of the amalgamation. 3. 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 issue of equity shares in the company, except that cash may be paid in respect of any fractional shares. 4. The business of the transferor company is intended to be carried on, after the amalgamation by the transferee company. 5. 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 ensured uniformity of accounting policies. B. Merger in nature of purchase An amalgamation in the nature of purchase takes place, when any one or more of the condition specified for the amalgamation in the nature of merger is not satisfied .under this nature of amalgamation one company acquires another company and equity shareholders of the combining entities do not continue to have proportionate share in the equity of the combined entity or the business of the combined entity is not intended to be combined after the amalgamation. Absorption When one or more existing companies go into liquidation and some existing company buys the business, it is known as absorption. For example A Ltd is going to purchase the business of B Ltd. then this is the case of absorption The important characteristics of absorption are as follows:

(1) SCO:209, F.F. Sector-36/D Chandigarh. 0172-4670390,9876149390 ,9041394669

ACCOUNTING SOLUTIONS SCO: 209, First Floor, Sector-36/D. Chandigarh (M): 0172-4670390, 9876149390,9041394669 1. There is no formation of any new company. 2. There is absorption of one or more existing companies by one existing company. 3. There is only liquidation of absorbed company while the absorbing company retains its legal entity. External reconstruction External reconstruction is effected by liquidating the company .it is just like by absorption. In it a new company is formed to purchase the business of an existing company. The assets and liabilities of the existing company are transferred to the newly formed company .X Ltd .goes into liquidation and new company Y Ltd .comes into existence to take over the business of X Ltd this is the case of external reconstruction. Difference between amalgamation, absorption & reconstruction The phenomenon of purchase of business of a corporate body, by another corporate body is described as “amalgamation and reconstruction “. The following entries should be passed in the books of transferor and transferee companies in the case of amalgamation.

In the books of transferor company 1. For transferring assets taken over by the transferee company. Realisation account ....Dr To various assets (individually) (at book value) 2. For transferring liabilities taken over by the transferee company. Various liabilities (individually) A/c Dr. (At book value) To realisation A/c 3. For purchase consideration Transferee company‘s A/c Dr. To realisation A/c 4. For receiving purchase consideration form the transferee company Bank A/c ...Dr Shares in transferee company‘s A/c ...Dr To transferee company‘s A/c 5. For assets sold by the transferor company not taken over by the transferee company Bank A/c ...Dr Realisation A/c (if loss on sale of assets) ...Dr To assets A/c To realisation A/c (if profit on sale of assets) 6. For liquidation expenses (a) If expenses are to be met by the transferor company Realisation A/c ...Dr To bank A/c (b) If expenses are to be met by the transferee company ,there are two alternatives : First alternative no entry Second alternative. The following two entries will be passed (i) Transferee co.’s A/c ...Dr To bank A/c (ii) Bank A/c ...Dr To transferee co.’s A/c 7. For liabilities not taken over by the transferee company when paid by the transferor company. Various liabilities A/c ...Dr Realisation A/c (If excess payment is made) ...Dr To bank A/c Or to shares in transferee co .A/c

(2) SCO:209, F.F. Sector-36/D Chandigarh. 0172-4670390,9876149390 ,9041394669

ACCOUNTING SOLUTIONS SCO: 209, First Floor, Sector-36/D. Chandigarh (M): 0172-4670390, 9876149390,9041394669 8.

9. 10.

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To realisation A/c (if less payment is made) For transferring preference share capital Preference share capital A/c ...Dr Realisation A/c ...Dr (if excess to be paid) To preference shareholders A/c To realisation A/c (if less to be paid) Preference shareholders ...Dr To equity /preference shares of transferee co. For closing realisation A/c (a) If profit Realisation A/c ...Dr To equity shareholders A/c (b) If loss Equity shareholders A/c ...Dr To realisation A/c For transferring equity share capital and accumulated profit: Equity share capital A/c ...Dr General reserve A/c ...Dr Debenture redemption fund A/c ...Dr Dividend equalisation reserve A/c ...Dr Securities premium A/c ...Dr Profit & loss A/c ...Dr Accident compensation fund A/c ...Dr (To the extent it does not denote the liability) Share forfeited A/c ...Dr Profit prior to incorporation A/c ...Dr Any other reserve or fund A/c ...Dr To equity shareholders A/c For transferring accumulated losses and expenses not written off Equity shareholders A/c ...Dr To profit and loss A/c (debit balance) To discount or expenses on issue of shares or debentures A/c To preliminary expenses To underwriting commission For paying shareholders Equity shareholders A/c ...Dr To bank or shares in Transferee Company A/c Accounting entries in the book of Transferee Company The accounting procedure will differ depending upon the type of amalgamation. There are two main methods of accounting for amalgamation in the books of Transferee Company: 1. The pooling if interest method 2. The purchasing method

1. The pooling of interest method The following journal entries are to be passed in the books of the transferee company for incorporating (1) On amalgamation of business Business purchase A/c ...Dr (with amount of purchase consideration) To liquidators’ of the transferee co .A/c (2) For recording assets and liabilities taken over Sundry assets (individually) (with book value)

(3) SCO:209, F.F. Sector-36/D Chandigarh. 0172-4670390,9876149390 ,9041394669

ACCOUNTING SOLUTIONS SCO: 209, First Floor, Sector-36/D. Chandigarh (M): 0172-4670390, 9876149390,9041394669 To sundry liabilities (individually) (with book value) To reserve A/c (with book value) To business purchase A/c (with book value) Combined entry Instead of passing two entries, one combined entry can be passed Sundry assets A/c ...Dr To sundry liabilities A/c To different reserve of the transferor co. A/c To liquidators of the transferor co. A/c (3) For making payment to the liquidator of the transferor company Liquidators of the transferor co. A/c To bank /share capital /securities premium (if any) (4) If liquidators expenses are paid by the transferee company General reserve or profit &loss A/c ...Dr To bank A/c (5) For the formation expenses of the transferee company Preliminary expenses A/c ...Dr To bank A/c

2. Purchase method The following journal entries are passed in the book of Transferee Company for incorporation of the financial statement of the transferor company: (1) For purchase of business form the transferor company Business purchase A/c ...Dr (for purchase consideration) To liquidation of transferor company (2) For recording assets & liabilities taken over Various assets A/c ...Dr (at revised value, if any otherwise at book value) To various liabilities A/c (with the figures at which they are taken over) To business purchases A/c (3) For making payment to the liquidator of the vendor company : Liquidators of the transferor company A/c ...Dr To bank A/c To share capital A/c (4) When statutory reserve is maintained Amalgamation adjustment A/c ...Dr To statutory reserve A/c (5) If liquidation expenses of the transferee company. Goodwill A/c ...Dr To bank A/c (6) For formation expenses of the transferee company if any Preliminary expenses A/c ...Dr To bank A/c (7) When goodwill is written off against capital reserve Capital reserve A/c ...Dr To goodwill A/c (8) If any liability is discharged by the transferee company Respective liability A/c ...Dr (with payable amount) To share capital /debentures/ Bank A/c ...Dr Methods of calculation of purchase consideration

(4) SCO:209, F.F. Sector-36/D Chandigarh. 0172-4670390,9876149390 ,9041394669

ACCOUNTING SOLUTIONS SCO: 209, First Floor, Sector-36/D. Chandigarh (M): 0172-4670390, 9876149390,9041394669 1. Lump Sum Method: When the transferee company agrees to pay a fixed sum to the transferor company, it is called a lump sum payment method of purchase consideration. 2. Net Worth or Net Assets Basis; Assets taken over by the transferee company xxx Less; liabilities assumed by transferee company xx Purchase consideration Notes: (a) Terms assets include all assets except fictitious assets. (b) Liabilities mean liability to outsiders i.e. excluding Equity paid capital, Preference capital and reserve and Surplus. (c) Trade Liabilities include trade creditors and Bills Payable Only. (d) Term business includes all assets excluding fictitious assets and deduction of all liabilities except equity share capital, preference share capital and reserves & Surplus. (e) Funds payable to outsiders also taken as part of liabilities, like employees PF, Workman saving bank account, Workman profit sharing Fund, Workman Compensation fund. 3. Net Payment Method: Purchase consideration = Total of Payments made by the transferee company in the form of shares, debentures and cash. Notes: (a) The assets and liabilities taken over by the transferee company are not to be considered. (b) As per AS-14, purchase consideration should not include payments made to debenture holders. Transferee Company has to made direct payments to debenture holders if these are assumed by Transferee Company. 4. Share exchange Method: Purchase Consideration: No. Of shares issued by Transferee Company to the transferor company X Market value or agreed value intrinsic value per share of Transferee Company. Treatment of Fractional Shares...when transferee company issued shared to the transferor company by ratio of exchange method. Then there may be chances of fractional shares. E.g. at A LTD is a transferor company who had issued capital of 10,000 shares of rs.10 each .B LTD is going to purchase the business of A LTD .on the basis of one shares to be issued for every 3 shares of A LTD In this case no of shares to be issued by B LTD =1/3*10,000=3333 1/3 shares BUT B LTD .will issued 3333 shares and will compensate with cash for 1/3 portion as per the market price of its share. Amalgamation

Absorption

Reconstruction

Basis of distinction

(5) SCO:209, F.F. Sector-36/D Chandigarh. 0172-4670390,9876149390 ,9041394669

ACCOUNTING SOLUTIONS SCO: 209, First Floor, Sector-36/D. Chandigarh (M): 0172-4670390, 9876149390,9041394669 1. Formation of new company. 2. No liquidating companies. 3. Objective.

4.position of companies

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New company is formed in amalgamation. At least two companies wind up their business. The aim of the amalgamation is to remove the competition among the entities. The position of companies is almost same.

No new company is formed in absorption. At least one company is required to windup its business. Generally weaker units are taken over by strong units. The position of purchasing company is comparatively better than vendor company.

No new company is formed in external reconstruction. One company is required to wind up business. The aim of the external reconstruction is to write off the accumulated losses and fictitious assets. The position of vendor company is bad because of accumulated losses and fictitious assets.

In the nature of merger In the nature of purchase In this case transferee company must Transferee company may or may not acquire whole business of the transferor acquire all assets and liabilities of the company which includes all assets and transferor company. liabilities of transferor company. Shareholder having at least 90% of the face This condition is not applicable in case of value of equity shares of the transferor amalgamation in the nature purchase. company becomes the equity shareholders of the transferee company. The claimcompany of equity must shareholders of The claim of the equity shareholders of the transferor be discharged by transferee transferor company may be discharged by company by issuing equity shares only ,except cash issuing equity shares or cash. All assets and liabilities of transferor Assets and liabilities of transferor company company are taken over by the transferee may be taken at book value or agreed company at book value as show by the value, as per their agreement. balance sheet of transferor company on the date of amalgamation Difference between purchase Such difference is taken as goodwill or consideration and net worth is taken as capital reserve as the case may be. general reserve or profit and loss A/c. Pooling of interest method Sr. no. Purchase method

(6) SCO:209, F.F. Sector-36/D Chandigarh. 0172-4670390,9876149390 ,9041394669

ACCOUNTING SOLUTIONS SCO: 209, First Floor, Sector-36/D. Chandigarh (M): 0172-4670390, 9876149390,9041394669 1.

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In this case transferee company must acquire whole business of the transferor company which includes all assets and liabilities of transferor company. Shareholders having at least 90% of the face value of equity shares of transferor company become the equity shareholders of the transferee company. The claim of the equity shareholders of the transferor company must be discharged by transferee company by issuing equity shares only, except cash in case of fraction shares. All assets and liabilities of transferor company are taken over by transferee company at book value as shown by the balance sheet of transferor company on the date of amalgamation.

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Transferee company may or may not acquire all assets and liabilities of the transferor company. This condition is not applicable in case of amalgamation in the nature of purchase The claim of the equity shareholders of the transferor company may be discharged by issuing equity shares or cash.

Assets and liabilities of transferor company may be taken at book value or agreed value, as per their agreement.

Such difference is taken as goodwill or capital reserve as the case may be. 5.

Difference between purchase consideration and net worth is taken as general reserve as the case may be.

(7) SCO:209, F.F. Sector-36/D Chandigarh. 0172-4670390,9876149390 ,9041394669