Short Notes On Amalgamation Of Companies

If you’re reading this, you have most likely cleared the CA foundation or the first level of the Chartered Accountancy course and reached the next level: CA Intermediate. Advanced Accounting is considered one of the most important exams at the Ca Inter Level. That is why, CA Exam Series is providing you with a few short important notes to study while keeping your mind fresh too. Here are a few things to keep in mind when you are studying Amalgamation of Companies.

· Amalgamation: When a new company (Amalgamated company/purchasing company) is formed to take over the business of two or more existing companies (amalgamating company/vendor company), it is called amalgamation. 

·Absorption: When an existing company takes over the business of one or more existing companies, it is called absorption. (In AS-14 the absorption is also referred to as amalgamation only)

Note: In Amalgamation & Absorption there is a combing of two or more businesses & that are covered by AS-14

· External Reconstruction: When a new company is formed to take over an existing company it is known as external reconstruction.

· Here there is only one business getting converted into a new name, no combining of businesses, hence not an Amalgamation as per AS-14.

· Internal Reconstruction: It is an arrangement whereby a company makes changes in its Capital Structure and the book value of other Assets & Liabilities without closing (Liquidating) the company.

Example: Z Ltd reduces its capital and liability and uses this credit to write off accumulated assets and reduce assets to their proper value. This is an example of internal reconstruction.

Amalgamation is defined in the Standard as Amalgamation means an amalgamation pursuant to the provisions of the Companies Act, 1956 or any other statute, which may be applicable to, companies.

Types of Amalgamation: Amalgamation for accounting purposes can be classified into two categories.

  1. Amalgamation in the nature of merger: In this type of amalgamation, there is genuine pooling of assets and liabilities of the combining entities. In addition, equity shareholders of the combined entities continue to have a proportionate share in the combined entity. The accounting treatment of such amalgamations should ensure that the resultant figures of assets, liabilities, capital, and reserves more or less represent the sum of the relevant figures of the amalgamating companies.
  2. Amalgamation in the nature of purchase: Amalgamation may be considered in the nature of purchase when any one or more of the five conditions specified for amalgamations in the nature of the merger is not satisfied.

The accounting procedures for amalgamation in the books of the transferee company will differ depending upon the type of amalgamation. There are two methods of accounting.

  1. Pooling of Interest Method
  2. Purchase Method

Pooling of Interest Method: The amalgamation is accounted for as if the separate business of the amalgamating companies were intended to be carried on by the transferee company. Accordingly, only minimal changes are made in aggregating the individual financial statements of the amalgamating companies.

Interest to Vendors: If the settlement is not done immediately then if agreed, interest at the given rate may be paid from the Date of purchase till the date of settlement, on the amount of purchase consideration. It will be Debited to Interest to vendors A/c & will be transferred to Profit & Loss a/c. The vendor company will credit it to realization a/c as income.