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. Advance Accounting is considered one of the most important exams in Ca Inter Level. That is why, CA Exam Series is providing you 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 combing of two or more business & 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 in to new name, no combining of business, hence not an Amalgamation as per AS-14.
· Internal Reconstruction: It is an arrangement whereby a company makes changes in its Capital Structure and book value of other Assets & Liabilities without closing (Liquidating) the company.
Example: Z ltd reduces its capital and liability and uses this credit to writes off accumulated assets and reduce assets to its proper value. This is an example of internal reconstruction.
The 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.
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.
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 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. Vendor company will credit it to realization a/c as income.