Accounting Aspects of Amalgamations

Narendra Kumar

30 Mar, 2023

Post and pre-amalgamation need to understand the points mentioned in AS-14.

What is AS-14 for Amalgamations of companies in India?

Accounting Standard-14 ‘Accounting for Amalgamations’ lays down accounting & disclosure Requirements with regard to amalgamations of companies & the treatment of any resultant goodwill or reserves.

Exception of above applicability

This standard doesn’t deal with the cases of acquisitions which arise when there is purchase by 1 company (acquiring company) of a whole or part of shares, or whole or part of the assets, of another company (acquired company) in consideration for payment in cash or by the issue of shares or other securities in acquiring company or partly in one form & partly in other. The distinguishing feature of an acquisition is that the acquired company isn’t dissolved & its separate entity continues to exist.

Amalgamation Types

Accounting Standard (AS)-14 recognizes 2 types of amalgamation:

• Amalgamation in the nature of merger.
• Amalgamation in the nature of the purchase.

An amalgamation should be considered in the nature of merger when all following conditions are satisfied:

1. All the assets & liabilities of Transferor Company become the assets and liabilities of the transferee company after amalgamation.
2. Shareholders who are holding not less than 90% of the face value of the equity shares of the transferor company (other than equity shares already held therein, immediately prior to amalgamation, by transferee company or its subsidiaries or their nominees) becomes equity shareholders of the transferee company by virtue of amalgamation.
3. The consideration for amalgamation receivable by those equity shareholders of Transferor Company who agree to become the equity shareholders of Transferee Company is discharged by Transferee Company wholly by the issue of equity shares in the transferee company, excluding that cash may be paid in respect of any fractional shares.
4. The business of Transferor Company is intended to be carried on, after amalgamation, by the transferee company.
5. No adjustment is intended to be made to book values of the assets & liabilities of Transferor Company when they are incorporated in the financial statements of the transferee company except to make sure uniformity of accounting policies.

An amalgamation should be considered n the nature of the purchase when any 1 or more of the conditions specified above isn’t satisfied. These amalgamations are in effect a mode by which 1 company acquires another company & hence, the equity shareholders of combining entities don’t continue to have a proportionate share in the equity of the combined entity or the business of an acquired company isn’t intended to be continued after amalgamation.

Methods of Accounting for Amalgamation

There are 2 main methods of accounting for amalgamations:

The pooling of interests method:

Since merger is the combination of 2 or more separate business, there isn’t any reason to restate carrying amounts of assets & liabilities. Accordingly, only minimal changes are made in aggregating individual financial statements of the amalgamating companies.

In preparing transferee company’s financial statements, the assets, liabilities & reserves (whether capital or revenue or arising on revaluation) of transferor company should be recorded at their existing carrying amounts & in the same form as at the date of amalgamation. The balance of the Profit & Loss Account of Transferor Company should be aggregated with a corresponding balance of the transferee company or transferred to General Reserve if any.

If at the time of amalgamation, the transferor & transferee company have conflicting accounting policies, an identical set of accounting policies should be adopted following the amalgamation. The effects on financial statements of any changes in accounting policies should be reported in accordance with the Accounting Standard (AS-5), Net Profit or Loss for the Period ‘Prior Period Items & Changes in Accounting Policies’.

The difference between an amount recorded as share capital issued (plus any additional consideration in the form of cash or other assets) & the amount of share capital of the transferor company should be adjusted in the reserves. It has been clarified that difference between the issued share capital of the transferee company & share capital of transferor company should be treated as capital reserve. The reasons given is that this difference is akin to the share premium. Furthermore, reserve created on amalgamation isn’t available for the purpose of distribution to the shareholders as dividend and/or bonus shares. It means that if consideration is beyond the share capital of the Transferor Company (or companies), the unadjusted amount is the capital loss & adjustment must be made, first of all in the capital reserves & in case capital reserves are insufficient, in a revenue reserve. However, if capital reserves & revenue reserves are inadequate the unadjusted difference may be adjusted against revenue reserves by making addition thereto by appropriation from profit & loss account. There should not be the direct debit to profit & loss account. If there is insufficient balance in the profit & loss account also, the difference should be reflected on the assets side of the balance sheet in a separate heading.

The purchase method:

In preparing the transferee company’s financial statements, the assets & liabilities of Transferor Company should be incorporated at their existing carrying amounts or, alternatively, the consideration should be allocated to individual identifiable assets & liabilities on the basis of their fair values at the date of amalgamation. The reserves (whether capital or revenue or arising on revaluation) of a transferor company, other than the statutory reserves, shouldn’t be included in financial statements of the transferee company except as in the case of a statutory reserve.

Any excess amount of the consideration over the value of net assets of the transferor company acquired by Transferee Company should be recognized in the transferee company’s financial statements as goodwill arising on account of amalgamation. If the amount of consideration is lower than the value of net assets acquired, the difference should be treated as Capital Reserve.

The goodwill arising on account of amalgamation should be amortized to income on the systematic basis of its useful life. The amortization period should not go above5 years unless a somewhat longer period can be justified.

The reserves of Transferor Company, except statutory reserve, shouldn’t be included in the financial statements of the transferee company. The statutory reserves refer to those reserves which are required to be maintained for legal compliance. The statute under which the statutory reserve is created may require an identity of such reserve to be maintained for such a specific period.

Where the requirements of relevant statute for recording statutory reserves in books of the transferee company are complied with, such a statutory reserves of transferor company should be recorded in financial statements of Transferee Company by crediting the relevant statutory reserve account. The corresponding debit should be given to a suitable account head (e.g., ’Amalgamation Adjustment Account’) which should be disclosed as the part of “miscellaneous expenditure” or another similar category on a balance sheet. When the identified statutory reserves are no longer required to be maintained, both the reserves & aforesaid account should be reversed.

Important to remember:

The pooling of interests method is used in case of amalgamation in the nature of merger. A purchasing method is used in accounting for the amalgamations in the nature of the purchase.

Computation of purchase consideration:

Below 2 methods are generally used for computation:

1. Purchase Consideration using net asset method:

Total of the assets taken over & this should be the fair values minus liabilities that are taken over at agreed amounts.

2. Purchase consideration using payments method:

Example: A. Ltd takes over B. Ltd & for that it agreed to pay Rs 5,00,000 in cash. 4 Lakh equity shares of Rs 10 each fully paid up at an agreed value of Rs 15 per share. The Purchase Consideration will be calculated as follows:

Also Read: Overview of AS-14: Accounting for Amalgamation