AMALGAMATION Presented by Cheranjit Das

DEFINITION  When two or more companies are combined into one by way of merger or taking over by the other, it is called amalgamation.  Amalgamation may be of two types Amalgamation in the nature of merger, and Amalgamation in the nature of purchase

 Transferor/Vendor Company : The company which is merged to or taken over or absorbed by another company. It is the company which sells its business.  Transferee/Vendee Company : The company which takes over or absorbs another company. It is the company which purchases business of another company.

AMALGAMATION IN THE NATURE OF MERGER Following conditions must be satisfied: 1.All assets and liabilities of transferor company become assets and liabilities of transferee company 2.Shareholders of not less 90% of the shares in transferor company get Eq. shares in the transferee company. Cash may be paid for fractional shares. 3.Business of transferor company carried on by transferee company.

4. No adjustment for value of assets and liabilities of transferor company made in the books of transferee company unless it is required to maintain uniformity in accounting policy.

AMALGAMATION IN THE NATURE OF PURCHASE  When any one or more of the condition for amalgamation in the nature of merger is followed, it is called amalgamation in the nature of purchase.

AMALGAMATION IN THE NATURE OF MERGER: COMPANY A + COMPANY B=COMPANY C (NEW COMPANY) AMALGAMATION IN THE NATURE OF PURCHASE: 1.COMPANY A ABSORBED BY COMPANY B 2.COMPANY A & B ABSORBED BY COMPANY C ETC.

METHODS OF ACCOUNTING There are two main methods of accounting for amalgamation: 1.Pooling of interest method, and 2.Business purchase method.

POOLING OF INTEREST METHOD  Assets and liabilities of transferor company taken over by transferee company at book value, unless valuation required for uniformity in accounting policy.  Difference in purchase consideration and net assets taken over if any adjusted with reserves.  All reserves of transferor company shown in the books of transferee company.

 All reserves of transferor company will be shown in the books of transferee company.  This method is followed in case of amalgamation in the nature of merger.

PURCHASE METHOD  Assets and liabilities are taken over at fair value. Book value shall be considered when fair value/market value/realisable amount/amount to be paid not stated.  No reserve except statutory reserve will be shown in the books of transferee company. Entry Amalgamation Adjustment A/C…..Dr. To Statutory Reserve A/C

 Difference in net assets taken over and purchase consideration is dealt as followed: Purchase consideration > Net assets, difference being GOODWILL Purchase consideration< Net Assets, difference being CAPITAL RESERVE  This method is followed in case of merger in the nature of purchase.

STATUTORY RESERVES  Reserve which is created / retained due to applicability of laws/acts, is called statutory reserve.  Example : Development Rebate Reserve, Investment Allowance Reserve, Export Profit Reserve, Workmen’s Compensation Reserve Etc.

JOURNAL ENTRIES  In the books of vendor/transferor company: 1.Open realisation account an transfer all assets at book value: Realisation A/C ………………………………Dr. To Sundry Assets A/C ( Except Cash, when not stated otherwise) (Being transfer of assets to Realisation A/c for the purpose of sale of business to ……ltd.)

2. Transfer liabilities and statutory reserves to Realisation A/C: Sundry liabities A/C…………………Dr. Statutory Reserve A/C ………………Dr. (Transfer all reserves in pooling of interest method) To Realisation A/C (Being transfer of liabilities taken over by…..ltd. To Realisation A/c)

3. Purchase Consideration Due: Transferee/Purchasing Company A/C ………Dr. To Realisation A/C (Being amount receivable from ….ltd. For sale of business)

4. Purchase Consideration Received: Bank A/C ……………………….Dr. Pref. Shares in …ltd. A/C………...Dr. Eq. Shares in …ltd. A/C…………Dr. To Transfee/Purchasing Company A/C (Being receipt of puchase consideration from sale of company)

5. Expenses of liquidation : a.Borne by vendor company: Realisation A/C………………….Dr. To Bank/Cash A/C (Being amount paid as liquidation/ realisation expenses)

b. Borne by transferee/ purchasing company: NO ENTRY required

c. 1 st Borne by vendor company, then reimbursed by transferee company : i. Transferee/Purchasing Company A/C……………..Dr. To Cash/Bank A/C ii. Cash/ Bank A/C……………………………….…Dr. To Transferee/ Purchasing Company A/C

6. Treatment of long term liabilities (Long term loan, Debenture etc.): 1.Taken over by transferee company Liability A/C ……………………..Dr. To Realisation A/C (Being liability taken over by ….ltd. Transfer to Realisation A/C)

2. Not taken over by transferee company ( in this case liability will be discharged by payment of cash): a.For debeture: Debenture A/C………………….………..Dr. Outstanding interest on Debenture A/C ….Dr. To Debentureholders A/C/ ( Being amount due to debentureholders transfer to DebentureholdersA/C)

Debentureholders A/C…………………………Dr. To Bank/Cash A/C (Being debentureholders paid off)

b. For Long term loan: Loan A/C…………………………………Dr. Outstanding Interest on Loan A/C………...Dr. To Bank/Cash A/C (Being Long term loan/loan paid off along with interest due on loan)

7. Payment to Pref. Shareholder: Pref. Share Capital A/C ………………………..Dr. Realisation A/C (premium if any)…………….....Dr. To Pref. Shareholders A/C (Being Pref. Share Capital and premium thereon transfer to Pref. Shareholders A/C)

Pref. Shareholders A/C…………………………Dr. To Bank/Cash A/C To Pref. Shares in ….ltd. A/C (Being final payment made to Pref. Shareholders)

8. Payment to Eq. Shareholders: A.At Pooling of Interest method: Eq. Share Capital A/C ………………………………..Dr. Realisation A/C..(credit Realiasation A/C if loss)……. Dr. To Eq. Shareholders A/C (Being Eq. Share Capital and profit on realisation transfer to Eq. Shareholdera A/C)

Eq. Shareholders A/C …………………………Dr. To Preliminary Expenses A/C To Profit & Loss A/C ( Dr. Balance) To Other Miscellaneous Expenditure A/C ( Being ……..transfer to Eq. Shareholders A/C)

Eq. Shareholders A/C…………………Dr To Cash/ Bank A/C To Eq. Shares in ….ltd. A/C (Being final payment made to Eq. Shareholders)

B. Purchase Method: Eq. Share Capital A/C ………………………………..Dr. Realisation A/C..(credit Realiasation A/C if loss)……. Dr. To Eq. Shareholders A/C To Reserves A/C (Other than statutory reserves) (Being Eq. Share Capital, profit on realisation and sundry reserves transfer to Eq. Shareholdera A/C)

Eq. Shareholders A/C …………………………Dr. To Preliminary Expenses A/C To Profit & Loss A/C ( Dr. Balance) To Other Miscellaneous Expenditure A/C ( Being ……..transfer to Eq. Shareholders A/C)

Eq. Shareholders A/C…………………Dr To Cash/ Bank A/C To Eq. Shares in ….ltd. A/C (Being final payment made to Eq. Shareholders)

 In the books of transferee or vendee company : 1.Purchase Consideration Due: Business Purchase A/C……………….Dr. To Liquidators of ….ltd. A/C (Amount payable to …..ltd. as per agreement for business purchase)

2. Transfer of assets and liabilities: Sundry Assets A/C ( Revalued Fig.)…………………………Dr. Goodwill A/C ( For extra payment in purchase method)…….Dr. To Sundry Liabilities A/C To Reserves ( Pooling of Interest Method) To Capital Reserve A/C (payment less than net assets purchase method) To General Reserve A/C (payment less than net assets POI Method) To Business Purchase A/C (Being assets and liabilities taken over )

3. Liabilities Paid off: Debenture in …ltd. A/C………….Dr. To Debenture A/C To Premium on Debenture A/C (Being issue of……..to ……of ……ltd. With a premium of Rs……..)

4. Realisation Expenses paid off: Goodwill A/C…………………Dr. To Cash/Bank A/C (Being realisation expenses paid/reimbursed)

5. Final Payment: Liquidators of …ltd. A/C…………………..Dr. To Cash/Bank A/C To Eq. Share Capital A/C To Pref. Share Capital A/C To Securities Premium A/C (Being final payment made to …….ltd. as per agreement)

6. Mutual indebtness (one company is debtor or creditor to another): Sundry Creditors A/C……………………………………Dr. To Sundry Debtors A/C (Being adjustment for mutual indebtness)