UNIT – 1

ACCOUNTING FOR AMALGAMATION

Concept of Amalgamation
Amalgamation is the blending of two or more existing companies into one company. For example, if
two existing companies say, X Ltd. and Y Ltd. go into liquidation to form a new company XY Ltd., it is
a case of amalgamation.
The Institute of Chartered Accountants of India has issued Accounting Standard (AS-14): “Accounting
for Amalgamation” which has come into force in respect of accounting periods commencing on or
after 1.4.1995 and is mandatory in nature.
(With the issue of this standard the terms used earlier viz. amalgamation; absorption and
external reconstruction have lost their distinction. It should be noted that amalgamation
includes absorption and reconstruction).

Meaning: Amalgamation means the merging of two or more than two companies for eliminating
competition among them or for growing in size to achieve the economies of scale. Amalgamation is a
broad term which includes mergers (uniting of two existing companies) and acquisition (one company
buying out another company).
It includes:
i. Two or more companies join to form a new company
ii. Absorption or blending of one by the other

Objectives of Amalgamation
The main objective of amalgamation is to achieve synergetic benefits which arise, when two
companies can achieve more in combination than when they are individual entities.
The other objectives of amalgamation are:
1. To reap economies of scale
2. To eliminate competition
3. To build up goodwill
4. To reduce the degree of risk through diversification
5. Managerial effectiveness.

DR. SAMIR M. VOHRA, ASSISTANT PROFESSOR, B.J.V.M. COMMERCE COLLEGE, VALLABH VIDYANAGAR. 1
 Absorption
The process in which one company acquires the business of another company is known as
Absorption.
When an existing company purchases the business of another company carrying on similar business,
it is called absorption i.e. one company absorbs another company.
( No new company is established in absorption).

The term absorption has two basic features:

1. There is no formation of a new company to take over the business of existing company or
companies.
2. Only the absorbed company or companies lose their entities by going into liquidation, absorbing
company continues to exist.

Amalgamation, as its name suggests, is nothing but two companies becoming one.
Absorption is the process in which the one dominant company takes control over the weaker
company.
(Amalgamation can occur in two ways i.e. in the form of merger or the form of absorption).

Difference between Amalgamation and Absorption

DR. SAMIR M. VOHRA, ASSISTANT PROFESSOR, B.J.V.M. COMMERCE COLLEGE, VALLABH VIDYANAGAR. 2
 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
1. 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.

2. 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.

DR. SAMIR M. VOHRA, ASSISTANT PROFESSOR, B.J.V.M. COMMERCE COLLEGE, VALLABH VIDYANAGAR. 3
 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.
2. 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. Pooling of Interest Method Purchase Method

No.

1. This method applies in the case of This method applied in the case of
amalgamation in nature of the merger amalgamation in nature of the purchase.

2. Asset, Liability and reserves of the The transferee Company records in its book
transferor company are also recorded by the of accounts only assets and liabilities taken
transferee Company. over reserves except for the statutory
reserves of the transferor company are not
aggregate with the transferee company.

3. The difference between the consideration The difference between the consideration
paid and the share capital of the transferor and the net asset is taken over is treated by
company is adjusted in the general reserve the transferee company as goodwill or free
or other reserves of the transferee reserve.
company.

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.

DR. SAMIR M. VOHRA, ASSISTANT PROFESSOR, B.J.V.M. COMMERCE COLLEGE, VALLABH VIDYANAGAR. 4
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.

DR. SAMIR M. VOHRA, ASSISTANT PROFESSOR, B.J.V.M. COMMERCE COLLEGE, VALLABH VIDYANAGAR. 5
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 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.

DR. SAMIR M. VOHRA, ASSISTANT PROFESSOR, B.J.V.M. COMMERCE COLLEGE, VALLABH VIDYANAGAR. 6