Company Accounts

Chapter- Amalgamation
B.Com.
Second Semester- (Sec. A)
Prof. Arvind Kumar
Dept. of Commerce
University of Lucknow
What is Amalgamation?
Amalgamation is defined as the combination of one or more companies into a new entity. It
includes:
i. Two or more companies join to form a new company
ii. Absorption or blending of one by the other
Thereby, amalgamation includes absorption. However, one should remember that
Amalgamation as its name suggests, is nothing but two companies becoming one. On the other
hand, Absorption is the process in which the one powerful company takes control over the
weaker company.
Transferor Company means the company which is amalgamated into another company; while
Transferee Company means the company into which the transferor company is amalgamated.
Procedure for Amalgamation
1. The terms of amalgamation are finalized by the board of directors of the amalgamating
companies.
2. A scheme of amalgamation is prepared and submitted for approval to the respective
High Court.
3. Approval of the shareholders of the constituent companies is obtained followed by
approval of SEBI.
4. A new company is formed and shares are issued to the shareholders of the transferor
company.
5. The transferor company is then liquidated and all the assets and liabilities are taken
over by the transferee company at their book value.
Amalgamation vs. Absorption vs. External Reconstruction
The brief discussion of the term amalgamation, absorption and external reconstruction are
shown in the following smart chart -
 Amalgamation Existing companies A and B are wound up and a new company AB Ltd.
is formed to take over the businesses of A and B
Absorption Existing company B takes over the business of another existing company
A which is wound up
External External reconstruction takes place when an existing company goes into
Reconstruction liquidation for the express purpose of selling its assets and liabilities to a
newly formed company which is generally owned and named alike.

Types of Amalgamation
According to AS-14, Amalgamation is of two types:
1. Amalgamation in the nature of merger
2. Amalgamation in the nature of purchase
1. 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 conditions is not satisfied in a process of amalgamation, it will not be
considered as amalgamation in the nature of merger.

2. 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.

Categories of Mergers

1.Cogeneric Merger – Within same industries and at the same level of economic activity

a) Horizontal Merger – Merger between business competitors who are manufactures or

distributors of the same type of products or who render similar or same type of services
for profit. Horizontal Mergers result in the reduction in number of competing
companies in an industry; increase the scope for economies of scale and elimination of
duplicate facilities.
 b) Vertical Merger – It occurs which are complementary to each other. In this merger the
two companies merge and control the production and marketing of the same product.

2. Conglomerate Merger – This type of merger involves coming together of two or more
companies engaged in different industries and/or services. Their businesses lack
commonalty either in their end product, or in the rendering of any specific type of
services to the society.

Methods of Accounting for Amalgamations

There are two main methods of accounting for amalgamations:
a) the pooling of interests’ method; and
b) the purchase method.

a. The pooling of Interest Method - the assets, liabilities and reserves of the transferor
company are recorded by the transferee company at their existing carrying amounts. If, at the
time of the amalgamation, the transferor and the transferee companies have conflicting
accounting policies, a uniform set of accounting policies is adopted following the
amalgamation. The effects on the financial statements of any changes in accounting policies
are reported in accordance with Accounting Standard (AS) 5, Net Profit or Loss for the Period,
Prior Period Items and Changes in Accounting Policies.

b. The Purchase Method - the transferee company accounts for the amalgamation either by
incorporating the assets and liabilities at their existing carrying amounts or by allocating the
consideration to individual identifiable assets and liabilities of the transferor company on the
basis of their fair values at the date of amalgamation. The identifiable assets and liabilities may
include assets and liabilities not recorded in the financial statements of the transferor company.
Where assets and liabilities are restated on the basis of their fair values, the determination of
fair values may be influenced by the intentions of the transferee company.

Determination of Purchase Consideration

In case of amalgamation, purchase consideration is the agreed amount which transferee

company (Purchasing company) pays to the transferor company (Vendor company) in
exchange of the ownership of the transferor company. It may be in form of cash, shares or any
other assets as agreed between both the companies. The amount of purchase consideration can
be computed under any of the following four methods:-

Methods of determination of Purchase Consideration

Lump Sum Net Worth or Net Intrinsic Value

Method Net Assets Payment Method (Shares
Method Method Exchange Method).

1. Lump Sum Method: The purchasing company may agree to pay a lump-sum to the
vendor company on account of the purchase of its business. In fact, this method is not
 based on any scientific thoughts and techniques. This method is an unscientific and
non-mathematical method of ascertaining purchase consideration.
2. Net Worth or Net Assets Method: Under this method, purchase consideration is
calculated by adding up the values of various assets taken over by the purchasing
company and then deducting there from the values of various liabilities taken over by
the purchasing company. The values of assets and liabilities for the purpose of
calculation of purchase consideration are those which are agreed upon between the
purchasing company and the vendor company and not the values at which the various
assets and liabilities appear in the Balance Sheet of the vendor company.

(Agreed value of Assets taken over) – (Agreed value of liabilities taken over) = Net
Assets

The following relevant points are to be noted while ascertaining the purchase price
under this method:

a) If the transferee company agrees to take over all the assets of the transferor
company, it would mean inclusive of cash and Bank balances.
b) The term all assets, however, does not include fictitious assets, like Debit
balance of Profit and Loss Account, Preliminary Expenses Account, Discount
and other expenses on issue of shares and Debentures, Advertising Expenses
Account etc.
c) Any specific asset, not taken over by transferee company, should be ignored
while computing the purchase price,
d) If there is any goodwill, pre-paid expenses etc. the same are to be included in
the assets taken over unless otherwise stated,
e) The term liabilities will always signify all liabilities to third parties. Trade
liabilities are those incurred for the purchase of goods such as Trade Creditors
or Bills Payable,
f) Other liabilities like Bank Overdrafts, Tax payable, Outstanding expenses etc.
are not a part of trade liabilities.
g) Liabilities do not include accumulated or undistributed profits like, General
Reserve, Securities Premium, Workmen Accident Fund, Insurance Fund,
Capital Reserve, Dividend Equalization Fund etc.

3. Net Payment Method: The agreement between selling company and purchasing
company may specify the amount payable to the share-holders of the selling company
in the form of cash or shares or debentures in purchasing company. AS – 14 states that
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 transferee company
to the share-holders of transferor company. Thus, under net payment method purchase
consideration is the total of shares, debentures and cash which are to be paid for claims
of Equity and Preference share-holders of the transferor company.

The following points are to be noted while ascertaining the purchase price under
net payment method:

(i) The assets and liabilities taken over by the transferee company and the values at
which they are taken over are not relevant to compute the purchase consideration.
 (ii) All payments agreed upon should be added, whether it is for equity shareholders
or preference share-holders.
(iii) If any liability is taken over by purchasing company to be discharged later on, such
amount should not be deducted or added while computing purchase consideration.
(iv) When liabilities are not taken over by the transferee company, they are neither
added or deducted while computing consideration.
(v) Any payment made by transferee company to some other party on behalf of
transferor company are to be ignored.

4. Intrinsic Value Method (Shares Exchange Method): Under this method, net value
of assets is calculated according to net assets method and it is divided by the value of
one share of transferee company which gives the total number of shares to be received
by the share-holders of transfer or company from the transferee company. When the
number of shares to be received by the transferor company is known then it is divided
by the existing shares of the transferor company and thus the ratio of shares can be
found out.

Intrinsic Value = Assets available for equity shareholders/Number of equity shares

Treatment of Balance of Profit and Loss Account on Amalgamation

 In the case of an ‘amalgamation in the nature of merger’, the balance of the Profit and
Loss Account appearing in the financial statements of the transferor company is
aggregated with the corresponding balance appearing in the financial statements of the
transferee company. Alternatively, it is transferred to the General Reserve, if any.
 In the case of an ‘amalgamation in the nature of purchase’, the balance of the Profit and
Loss Account appearing in the financial statements of the transferor company, whether
debit or credit, loses its identity

Treatment of Goodwill Arising on Amalgamation

Goodwill arising on amalgamation represents a payment made in anticipation of future income

and it is appropriate to treat it as an asset to be amortized to income on a systematic basis over
its useful life. Due to the nature of goodwill, it is frequently difficult to estimate its useful life
with reasonable certainty. Such estimation is, therefore, made on a prudent basis. Accordingly,
it is considered appropriate to amortize goodwill over a period not exceeding five years unless
a somewhat longer period can be justified.

Benefits achieved from Merger and Amalgamation

Amalgamation is one of the tools that can help companies avoid competition among them and
add to the market offerings. It is for the mutual advantage of the acquirer and acquired
companies. It serves as an apt method of corporate restructuring to bring about a change for
the better and make business environment competitive. Following are the key advantages of
amalgamation-

 Coming together to produce a new or enhanced effect.

 Reduction in the average cost of production and hence in the unit costs when output is
increased, to enable to offer products at more competitive prices and thus to capture a
larger market share.
 Reduction in production, administrative, selling, legal and professional expenses.
 Mutual benefit by reducing competition, saving costs by reducing overheads,
capturing larger market, pooling technical or financial resources.
 Optimum Use of capacities and factors of production
 Tax advantage – Carry forward and setoff of losses of a loss – making amalgamating
company against profits of a profit – making amalgamated company
 Financial constraints for expansion can be removed
 Diversification
 Advantage of Brand – Equity
 Survival
 Revival of Sick Company
 Substantial Growth

Disadvantages of Amalgamation

 Amalgamation may lead to elimination of healthy competition

 Reduction of employees may take place
 There could be additional debt to pay
  Business combination could lead to monopoly in the market, which is not always
positive
 The goodwill and identity of the old company is lost

Examples of Amalgamations
1. Maruti Motors operating in India and Suzuki based in Japan amalgamated to form a
new company called Maruti Suzuki (India) Limited.
2. Gujarat Gas Ltd (GGL) is an amalgamation of Gujarat Gas Company Ltd (GGCL) and
GSPC Gas.
3. Satyam Computers and Tech Mahindra Ltd
4. Tata Sons and the AIA group of Hongkong amalgamated to form Tata AIG Life
Insurance.
Accounting Entries for Amalgamation
What is Demerger?

Demerger is a form of corporate restructuring in which the entity's business operations are
segregated into one or more components. It is the converse of a merger or acquisition.
Demergers can be undertaken for various business and non-business reasons, such as
government intervention, by way of anti-trust law, or through decartelization.