Chapter - 2

AMALGAMATION OF COMPANIES

There are many forms of business combinations to obtain the economies of large scale production or
to avoid the cut throat competition. They are amalgamation, absorption, external reconstruction etc.

1. Amalgamation:
The term amalgamation is used when two or more existing companies carrying on similar business go
into liquidation and a new company is formed to take over the business of liquidated companies.
Ex: A Ltd. and B Ltd. are taken over by a newly formed company C Ltd.

2. Absorption:
The term absorption is used when an existing company takes over the business of one or more
existing companies which go into liquidation.
Ex: A Ltd. which is already in business takes over the business of B Ltd.

3. External Reconstruction:
In external reconstruction, one existing company goes into liquidation and a new company is formed
to take over the former company by the very same members.
Ex: if an existing Bharat Ltd is wound up and its business is sold to a new company, say, Nav Bharat
Ltd., formed by most of the members of Bharat Ltd.,

Definitions as per Accounting Standard 14 (AS‐14)

a. Amalgamation – means an amalgamation pursuant to the provisions of the Companies Act 2013
or any other statute which may be applicable to companies.

b. Transferor Company – means the company which is amalgamated into another company.
c. Transferee Company – means the company to which a transferor company is amalgamated.
d. Reserve – means the portion of earnings, receipts or other surpluses of an enterprise (whether
capital or revenue) appropriated by the management for a general or a specific purpose other
than provision for depreciation or diminution in the value of assets or for a known liability.

Types of Amalgamation
As per AS‐14 there are two types of amalgamation:
1. Amalgamation in the nature of merger and
2. Amalgamation in the nature of purchase.

1. Amalgamation in the nature of Merger

An amalgamation should be considered to be an amalgamation in the nature of merger when all the
following conditions are satisfied:
1) All the assets and liabilities of the Transferor Company or companies, after amalgamation should
become, the assets and liabilities of the transferee company.
2) Shareholders holding not less than 90% of the face value of the equity shares of the transferor
company (excluding the proportion held by the transferee company) should become the
shareholders of the transferee company.
3) The consideration payable to the above mentioned shareholders should be discharged by the
transferee company by the issue of the equity shares and cash can be payable in respect of
fractional shares.
4) The business of the Transferor Company/ companies is intended to be carried on 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/ companies when they are incorporated in the financial statements of the
transferee company except to ensure uniformity of accounting policies.

2. Amalgamation in the nature of purchase

An amalgamation should be considered to be an amalgamation in the nature of purchase, when any
one or more of the conditions specified for amalgamation in the nature of merger is not satisfied.

Difference between Amalgamation in the nature of merger and Amalgamation in the

nature of purchase

Basis of Distinction Amalgamation in the nature of Amalgamation in the nature of

Merger Purchase
Transfer of Assets & There is transfer of all assets & There need be transfer for all assets &
Liabilities liabilities liabilities.
Shareholders of Equity shareholders holding 90% Equity shareholders need not become
Transferor company equity shares in transferor company shareholders of transferee company.
become shareholders of Transferee
company.
Purchase Purchase consideration is discharged Purchase consideration need not be
Consideration wholly by issue of equity shares of discharged wholly by issue of equity
transferee company (except cash only shares.
for fractional shares).
Same Business The same business of the transferor The business of the transferor
company is intended to be carried on company need not be intended to be
by the transferee company. carried by the transferee company.
Recording of Assets The assets & liabilities taken over are The assets & liabilities taken over are
& Liabilities recorded at their existing carrying recorded at their existing carrying
amounts except where adjustments is amounts or the basis of their fair
required to ensure uniformity of values.
accounting policies.
Method of Journal entries for recording the Journal entries for recording the
Accounting merger are passed by pooling of purchase of business are passed by
interest method. purchase method.
Transfer of Profit & The balance of P&L A/c of the The balance of P&L A/c of the
Loss transferor company aggregated with transferor company is not included in
the balance of the P&L A/c of the the books of the transferee company.
transferee company.
Transfer of All reserves whether capital or Only statutory reserves of
Reserves revenue of Transferor Company Transferor Company are taken in
are merged into the reserves of the books of Transferee Company
Transferee Company. in order to preserve their identity.
Accounting for Amalgamation
There are two methods of accounting for amalgamation, viz,
a) The pooling of Interest method
b) The purchase method

1. The pooling of interest method:

1) This method is adopted in case of amalgamation in the nature of merger.
2) Under pooling of interest method, all assets, liabilities and reserves of the transferor company
will be recorded by the transferee company at book values unless any adjustment is required
due to different accounting policies followed by these companies.
3) The difference between the amount recorded as share capital issued (plus any additional
consideration in the form of cash or other assets) and the amount of share capital of the
transferor company should be adjusted in reserve.

2. The purchase method:

A. This method is adopted in case of amalgamation in the nature of purchase.
B. Under purchase method, assets and liabilities of the transferor company, taken over, will be
recorded in the books of the transferee company at agreed values.
C. No reserves (other than statutory reserve) of the transferor company will be taken
over/recorded in the books of the transferee company.

Statutory reserve: it refers to the reserves to be maintained as per the requirements of any law
or legislation only in case of amalgamation in the nature of purchase (purchase method).
Statutory reserve must be treated like any other liability in the realisation account in the books
of the transferor company and should be incorporated in the balance sheet of transferee
company by the way of following entry.
Amalgamation adjustment account Dr.
To statutory reserve account
Statutory reserve must be taken under “Reserves and surplus” and Amalgamation adjustment
account under “Miscellaneous Expenditure” i.e., Other non-current assets in the balance sheet.

Differences between Pooling of Interest Method and Purchase Method

Pooling of Interest Method Purchase Method
1. All assets and liabilities of transferor 1. Only assets and liabilities taken over by
company will be incorporated in the books transferee company, will be incorporated
of transferee company. in its books.

2. All reserves of transferor company will be 2. Other than statutory reserve, no other
recorded in the books of transferee reserves of the transferor company will be
company. recorded in the books of transferee
company.

3. The assets and liabilities of transferor 3. The assets and liabilities of transferor
company will be recorded in the books of company will be recorded in the books of
transferee company at book values. transferee company at book values/agreed
values.
 4. Any difference between purchase 4. Any difference between purchase
consideration and value of assets and consideration and value of assets and
liabilities taken over, must be adjusted liabilities taken over, must be treated as
against general reserves. goodwill or capital reserve, as the case
may be.

Purchase Consideration
Purchase consideration is the amount which is paid by the transferee company for the purchase the
business of Transferor Company.
As per AS‐14, consideration for amalgamation means “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”.
Purchase consideration does not include any payment to outsiders including debenture holders.
The purchase consideration may be calculated in the following ways:
1. Lump Sum Method: When the transferee company agrees to pay a fixed sum to the transferor
company, it is called lump sum payment of purchase consideration. For example, X Ltd
purchases the business of Y Ltd for a consideration of ₹ 1000000.

2. Net Worth (Net Assets) Method: Under this method, the net worth of the assets taken over
by the transferee company is taken as purchase consideration. Here,

Particulars ₹
Assets taken over at agreed value xxx
Less: Liabilities taken over at agreed value xxx
Purchase Consideration xxx

The following points are noted while calculating purchase consideration under his method:
a. Cash balance is usually included in assets. But if it is not taken over, it will not be included.
b. Fictitious assets should never be added.
c. Accumulated profits and reserves should not be considered.
d. The term ‘liabilities’ include all liabilities to third parties. But ‘trade liabilities’ include only
trade creditors and bills payable.
e. The term ‘business’ will always means both the assets and liabilities.

3. Net Payment method: Under this method, purchase consideration is the aggregate of all
payments in the form of cash, shares, securities etc. to the shareholders of the transferor
company by the transferee company.

Particulars ₹
Payment in Equity shares xxx
Payment in Preference shares xxx
Payment in Debentures xxx
Cash xx
Purchase Consideration Xxx
 The following points are considered while calculating purchase consideration under this
method:
a. The assets and liabilities taken over by the transferee company are not considered.
b. Purchase consideration includes the payments to shareholders only.
c. Any payments made by the transferee company to some other party on behalf of the
transferor company are to be ignored.

4. Share exchange or Intrinsic value Method: Under this method purchase consideration is
calculated on the basis of intrinsic value of shares. The intrinsic value of a share is calculated by
dividing the net assets available for equity shareholders by the number of equity shares. This
value determines the ratio of exchange of the shares between the transferee and transferor
companies.

Classification of Accounts

Trade Liabilities Liabilities Accumulated Profits

1.Sundry Creditors ( or 1. Trade Creditors 1. Profit and Loss A/c
Creditors) 2. Bills Payable (Cr)
2.Bills Payable 3. Bank over draft 2. General Reserve
4. Debentures 3. Reserve Fund
5. Loans 4. Revenue Reserve
6. Pension fund 5. Sinking Fund or
Debenture
7. Provident fund
Redemption Fund
8. Super Annuation Fund
6. Capital Redemption
9. Workman Savings bank
Reserve
account
7. Shares forfeited
10. Workman profit account
sharing fund 8. Securities premium
11. Provision for Taxation Account
12. Unclaimed Dividend 9. Workman
13. Outstanding Expenses Compensation Fund
10. Workman Accident
Fund
11. Insurance Fund
12. Dividend
Equalisation Fund
13. Dividend Rebate
Reserve
 Provisions Accumulated Losses or Statutory Reserve
Fictitious Assets
1. Provision for 1. Profit and Loss A/c 1. Investment
Depreciation or (Dr) Allowance Reserve
Depreciation Fund 2. Preliminary 2. Development
2. Provision for Expenses Rebate Reserve
Doubtful Debt 3. Discount on issue 3. Foreign Project
3. Provision for of Shares, Reserve
Investment Debentures 4. Export profit
4. Investment 4. Underwriting Reserve etc.,
Fluctuation fund Commission
5. Provision for
Repairs and
Renewals

STEPS IN ACCOUNTING PROCEDURE OF AMALGAMATION, ABSORPTION AND EXTERNAL

RECONSTRUCTION
a. Calculation of purchase consideration.
b. Ascertainment of discharge of purchase consideration.
c. Closing the books of transferor companies.
d. Passing opening entries in the books of purchasing or transferee company.

Accounting entries in the books of transferor/Selling company

Step 1: Transfer of Assets and Liabilities to Realization A/c

1. For transferring assets to Realization A/c:
Realization A/c Dr
To Various Assets A/c (individually at book value)

Note :
a) Fictitious assets should not be transferred to Realization A/c
b) Cash in hand and bank are not taken over by transferee company should not be transferred to
Realization A/c. But it can be taken as opening balance of cash or bank A/c
c) Other assets, even if they are not taken over, should be transferred to Realization A/c

2. For transferring liabilities(outside liabilities only) to Realization A/c:

Various Liabilities A/c Dr (individually at book value)
To Realization A/c

Note:
a) If any liability is not taken over by transferee company should not be transferred to Realization
A/c,
b) Items in the nature of provisions are to be transferred to Realization A/c
c) Any fund which denotes both liability and reserve, the portion of liability should be transferred
to Realization A/c.
Step 2: Purchase Consideration
3. For purchase consideration due from Purchasing company:
Purchasing Company A/c Dr
To Realization A/c

4. On receiving or discharging purchase consideration:

Equity shares in Purchasing company A/c Dr

Preference shares in Purchasing company A/c Dr
Debentures in Purchasing company A/c Dr
Cash/ Bank A/c Dr
To Purchasing company A/c

Step 3: Assets and Liabilities not taken over

5. For sale of assets not taken over by Purchasing company:
Cash/ Bank A/c Dr (Sale proceeds)
To Realization A/c

6. For discharging liabilities not taken over by Purchasing company:

Concerned Liability A/c Dr
Realization A/c Dr (if excess amount paid)
To Cash/ Bank A/c
To Realization A/c (If less payment is made)

Step 4: Liquidation expenses

7. For liquidation (realization) expenses:
a. If liquidation expenses are met by Selling company.
Realization A/c Dr
To Cash/ Bank A/c

b. If liquidation expenses are met by Purchasing company. No entry is required.

c. If liquidation expenses paid by the purchasing co. not directly, but through selling company

1. For making payment

Purchasing Company A/c Dr
To Cash/bank A/c

2. For collecting the amount from the transferee company

Cash/bank A/c Dr
To Purchasing Company A/c

Step 5: Payment to Preference Shareholders

8. For preference share capital due:
a. Payable at par
Preference Share Capital A/c Dr
To Preference Shareholders A/c
 b. Payable at a premium
Preference Share Capital A/c Dr
Realisation A/c Dr
To Preference shareholders A/c

c. Payable at a Discount
Preference Share Capital A/c Dr
To Preference Shareholders A/c
To Realization A/c

9. For paying off Preference shareholders:

Preference shareholders A/c Dr
To Preference shares in purchasing company A/c
To Cash/ Bank A/c (if any)
To Debentures in purchasing company A/c (if any)

Step 6: Closure of Realization Account

10. For closing Realization A/c:

a. For loss on realization (if debit > credit).
Equity shareholders A/c Dr
To Realization A/c

b. For profit on realization (if credit > debit).

Realization A/c Dr
To Equity shareholders A/c

Step 7: Transfer of Equity share capital, Reserves, Accumulated profits and Fictitious Assets.

11. For transferring equity share capital, reserves etc.

Equity share capital A/c Dr
General reserve A/c Dr
P&L A/c Dr
Dividend equalization reserve A/c Dr
Security premium A/c Dr
Any other Reserves or Fund A/c Dr
To Equity Shareholders A/c

12. For transferring fictitious assets:

Equity shareholders A/c Dr
To P&L A/c (Loss)
To preliminary expenses
To Discount/ expense on issue of shares/ debentures
Step 8: Final payment to Equity Shareholders

13. For payment to equity shareholders:

Equity shareholders A/c Dr
To Equity shares in Transferee company A/c
To Cash/ Bank A/c (if any)

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

Ledger Accounts:
1) Realisation Account:
When the company is liquidated, its books of account are to be closed and the profit or loss
arising on realisation of its assets and discharge of liabilities is to be computed. For this
purpose, a Realisation Account is prepared to ascertain the net effect (profit or loss) of
realisation of assets and payment of liabilities which is transferred to Equity shareholders A/c.
Hence, all assets (other than cash & bank balance not taken over and fictitious assets, if any),
all external liabilities are transferred to this account. It also records sale of assets (not taken
over), realisation expenses (paid by transferor) & purchase consideration due. The balance in
this account is termed as profit or loss in realisation which is transferred to Equity shareholders
A/c.

2) Purchase Co. A/c

3) Equity Shareholders A/c
4) Preference Shareholders A/c
5) Equity Shares in Purchasing company
6) Preference Shares in Purchasing company
7) Any Asset or liability not taken over by the transferee Company
8) Cash or Bank A/c

Accounting entries in the books of Transferee/Purchasing company

(Amalgamation in the nature of purchase)

1. For Purchase Consideration due:

Business Purchase A/c Dr
To Liquidator’s Transferor Company A/c

2. For assets and liabilities taken over:

Assets A/c Dr (At revised, otherwise at book value)
Goodwill A/c Dr (if credit > debit)
To Liabilities A/c (At revised, otherwise at book value)
To Business Consideration A/c (purchase consideration)
To Capital reserve (if debit > credit)

3. For payment of purchase consideration:

Liquidator of transferor company A/c Dr
To Share capital A/c
To Debenture A/c
To Bank A/c
 (Note: if shares are issued at premium, security premium A/c is credited with premium. If
shares are issued at discount, discount on issue of shares A/c is debited with discount).

4. For payment of liquidation expenses by transferee company:

Goodwill/ Capital reserve Dr
To Cash/ Bank A/c

5. For payment of formation expenses:

Preliminary expenses A/c Dr
To Cash/ Bank A/c

6. If there are both Goodwill and Capital reserve A/c, Goodwill may be set off against Capital
reserve:
Capital Reserve A/c Dr
To Goodwill A/c

7. If any liability (including debenture) is discharged by transferee company:

Concerned Liability A/c Dr (Amount payable)
To Share capital/ Debenture/ Bank A/c

8. To record Statutory Reserves of transferor company:

Amalgamation Adjustment A/c Dr
To Statutory Reserve A/c
(Note: Amalgamation adjustment A/c is shown on the assets side of the company’s Balance
Sheet under the head “Miscellaneous Expenditure”).

9. Fresh issue of shares to raise further capital:

Cash/Bank A/c Dr.
Discount on issue of shares A/c Dr. (if it is issued at discount)
To Share capital A/c
To Securities Premium A/c (if it is issued at premium)