Chapter – 1 Mergers Chapter outcomes: Meaning and nature of mergers; Different types of mergers; Amalgamation, absorption and external reconstruction; Purchase consideration; Methods of calculating purchase consideration; Accounting entries in the books of vendor company; Accounting entries in the books of purchasing company; Practical exercises;

Amalgamation, Absorption and Reconstruction Amalgamation is the process whereby two or more companies joint together to form a new company in which existing companies are liquidated and a new company is formed. Example: A Ltd and B Ltd are amalgamated and C Ltd is formed to take over their businesses. A ltd and B ltd are called amalgamating companies. C ltd is called new company

Absorption Absorption is a process by which an existing company takes over the business of one or more existing companies. The company which takes over the business other companies is known as purchasing company and the companies which are taken over are called vendor companies. Example: Oman Textile Mills Co. takes over the business of Muscat Textile Mills Co. In this case, Oman Textiles Mills Co. is purchasing company and Muscat Textiles Mills Co. is vendor company.

Reconstruction Reconstruction may be two types: Internal Reconstruction External Reconstruction Internal reconstruction refers to the process of re-arrangement of capital and liabilities in order to ensure an optimum capital structure. External reconstruction involves the liquidation of an existing company in order to form a new company in which the new company will take over the business of liquidated company. Example: Muscat Chemical Ltd is liquidated to form Muscat Chemical (new) company Ltd.

Meaning of Purchase consideration Consideration means the aggregate of the shares and other securities issued and payment made in the form of cash or other assets by the transferee company (Purchasing company) to the shareholders of the transferor company (Vendor Company). The analysis of the aforesaid definition of ‘purchase consideration’ makes it clear that the payments made by the transferee company to discharge the debenture holders and other outside liabilities and the cost of winding up of transferor company shall not be considered as part of purchase consideration.

Methods of calculation of purchase consideration There are broadly two methods followed in the calculation of purchase consideration: Net Assets method; Net payment method: Under the net assets method, the purchase consideration is calculated taking into account the various assets and liabilities taken over by the purchasing company. Here, the consideration will be equal to the excess of assets taken over by the purchasing company over the liabilities taken over by the purchasing company

Under net payment method the amount of purchase consideration is the sum total of the various payments being made by the purchasing company against the various assets and liabilities taken over. This may include: Issue of equity shares; Issue of preference shares Issue of debentures; Payment of cash

Pro forma Journal entries in the books of vendor company The following journal entries are passed in the books of vendor company: 1. Transfer of assets taken over by the purchasing company: Realization Account Dr. XXXX Various assets account Cr. XXXX (Being the various assets taken over by the purchasing company) 2. Transfer of liabilities taken over the purchasing company : Liabilities Account Dr. XXXX Realization Account Cr. XXXX (Being the various liabilities taken over) 3.For the purchase consideration due from the purchasing company: Purchasing Company Account Dr. XXXX Realization Account Cr. XXXX (Being the purchase consideration due)

4. When the purchase consideration is received: Shares in purchasing co. A/C Dr. XXXX Debentures in purchasing co. ac. Dr. XXXX Bank Account Dr. XXXX Purchasing Company Account Cr. XXXX (Being the purchase consideration received) 5. For the sale of assets not taken over by the purchasing co: Bank account Dr. XXXX Realization Ac. Dr. XXXX (if loss) Asset Account Cr. XXXX Realization account Cr. XXXX (if profit) (Being the asset sold) 6. For the payment of liabilities not taken over by the purchasing co: Liabilities account Dr. XXXX Realization Ac Dr. XXXX (if loss) Bank Account Cr. XXXX Realization account Cr. XXXX (if profit) (Being the liabilities paid)

7. Profit or loss on realization: If profit: Realization Account Dr 7. Profit or loss on realization: If profit: Realization Account Dr. XXXX Equity Shareholders Ac. Cr. XXXX (Being the profit on realization transferred to shareholders account) If loss: Equity shareholders’ account Dr. XXXX Realization Account Cr. XXXX (Being the loss transferred to Equity shareholders account) 8. When the final settlement is made to shareholders: Equity shareholders account Dr. XXXX Equity shares in purchasing co. Ac. Cr. XXXX Preference shares in purchasing Co. Ac Cr. XXXX Debentures in purchasing co. Cr. XXXX Bank account Cr. XXXX (Being the final settlement of the shareholders)

Pro forma Journal entries in the books of purchasing co When the assets and liabilities are taken over by the purchasing company: Various assets account Dr. XXXX Various liabilities account Cr. XXXX Liquidators of vendor company Cr. XXXX (Being the assets and liabilities taken over and the purchase consideration payable) 2. When purchase consideration is paid: Liquidators of vendor co. account Dr. XXXX Share capital account Cr. XXXX Debentures account Cr. XXXX Bank account Cr. XXXX (Being the purchase consideration paid)