Finance & Accounting

Overview of AS-14: Accounting for Amalgamation

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.

Types of Amalgamation

• Amalgamation in the Nature of Merger
  • All the assets and liabilities of the transferor company becomes asset and liabilities of the transferee company.
  • Shareholders holding not less than 90% of the face value of equity shares of Transferor Company becomes the equity shareholder of the transferee Company.
  • After incorporating the financial statements of the Transferee Company no adjustments should be made to the book value of assets and liabilities of the Transferor Company.
  • The business of the Transferor Company is intended to be carried on by the Transferee Company

• Amalgamation in the Nature of Purchase

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.

Methods of Accounting for Amalgamation

As mentioned in AS-14 there are two types of Accounting for Amalgamation:

1. Pooling of Interest Method

In this method balance sheet of both companies were added together during acquisition or merger based on the book value.

• Purchase Method

In this method accounting of merger and acquisition in which one firm has purchased the asset of the other firm.

Difference between Pooling of Interest Method and Purchase Method

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.

Treatment of Goodwill Arising on Amalgamation

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:

1. The future of the business
2. Changes in demand and other economic factors
3. Expected or Potential competitors
4. Legal, regulatory or contractual provisions affecting the life of Goodwill

Treatment of Reserve described in a scheme of Amalgamation

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:

• A detailed accounting treatment given to the reserves and the reason for the treatment given to reserves different from that as prescribed in the standard.
• Treatment of Reserves described in the scheme of amalgamation is different compared to the requirement of this standard that would be considered that no treatment has been prescribed by the scheme.
• Any financial effect arising due to such deviations.

Disclosure

As mentioned in AS-14 the acquirer shall disclose the following in the Financial Statement:

• Name and general nature of the business of Amalgamating Company
• Effective date of amalgamation for accounting purpose
• Particular scheme sanctioned under the law.
• Method of accounting used to reflect the amalgamation.

Additional Disclosure required under the Pooling Interest Method.

• Number of shares issued along with the percentage of each Company equity shares exchanged to effect the amalgamation.
• Amount of any difference between the consideration and the value net identified assets acquired and the treatment thereof.

Additional Disclosure required under the Purchase Method.

• Consideration for the amalgamation and consideration paid or contingently payable.
• The amount of any difference between the consideration and the value of net identifiable assets acquired and treatment thereof including the period of amortization of any goodwill arising on goodwill.

Conclusion

This Standard helps the Companies to keep the uniformity in Accounting for amalgamation^[1] 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.