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There is a specific standard mentioned in the Accounting Standard for Accounting for Amalgamation i.e. AS-14. The Accounting Standard (AS-14) is applicable when two companies amalgamate and accounting for amalgamation has been given effect. This Standard deals with the accounting treatment in the books of Transferee Company.
Amalgamation in the Nature of Purchase will only be considered when any one or more of the conditions mentioned in “Amalgamation in the nature of Merger” is not satisfied.
As mentioned in AS-14 there are two types of Accounting for Amalgamation:
In this method balance sheet of both companies were added together during acquisition or merger based on the book value.
In this method accounting of merger and acquisition in which one firm has purchased the asset of the other firm.
|Sr. No.||Pooling of Interest Method||Purchase Method|
|1.||This method applies in the case of amalgamation in nature of the merger||This method applied in the case of amalgamation in nature of the purchase.|
|2.||Asset, Liability and reserves of the transferor company are also recorded by the transferee Company.||The transferee Company records in its book of accounts only assets and liabilities taken over reserves except for the statutory reserves of the transferor company are not aggregate with the transferee company.|
|3.||The difference between the consideration paid and the share capital of the transferor company is adjusted in the general reserve or other reserves of the transferee company.||The difference between the consideration and the net asset is taken over is treated by the transferee company as goodwill or free reserve.|
|4.||It records at book value.||It records at fair market value.|
|5.||It applies in Merger||It applies to acquisition.|
Goodwill arising on Amalgamation represents a future income and it is considered as an asset of the Company. Due to the nature of goodwill, it becomes difficult to estimate its useful life. It is considered to amortized goodwill over a period not exceeding five years.
Factors to be considered in estimating the useful life of goodwill arising on amalgamation include:
The Scheme of amalgamation sanctioned under the law prescribes the treatment to be given to the reserves in the transferor company and accordingly as mentioned in the scheme it should be followed. If the Scheme of amalgamation has been sanctioned under the law and treatment of reserves given to the transferor company is different compared to the requirement of this standard that would be considered that the no treatment has been prescribed by the scheme, the following disclosure is required in the first financial statement following the amalgamation:
As mentioned in AS-14 the acquirer shall disclose the following in the Financial Statement:
Additional Disclosure required under the Pooling Interest Method.
Additional Disclosure required under the Purchase Method.
This Standard helps the Companies to keep the uniformity in Accounting for amalgamation and accordingly, the Companies need to give the treatment and if there is any deviation in the treatment needs to be disclosed in the financial statement so that stakeholders can get the transparency.