Amalgamation & Absorption

Prepared by:
Mohd. Rehan
Assistant Professor
ARSD College
Meaning of Amalgamation
When two or more existing companies go into
liquidation and a new company is formed to take over
their business , it is known as amalgamation.
The institute of chartered accountants of India has issued
Accounting Standard 14 (AS 14) on accounting for
amalgamation. This standard specifies the procedure of
accounting for amalgamation and the treatment of any
resultant goodwill or reserve.
Types of Amalgamation
From Accounting point of view :

A. Amalgamation in the nature of merger.

B. Amalgamation in nature of purchase.
Amalgamation in the nature of Merger
An amalgamation should be considered in nature of merger if it
fulfills following conditions :
1. All assets & Liabilities of the transferor company
become the assets & liabilities of transferee co. after
amalgamation.
2. Shareholders holding not less than 90% of face value of
equity share capital of the transferor company (other
than equity shares already held therein, immediately before
the amalgamation, by the transferee company or its
subsidiaries or their nominees) become the equity
shareholders of the transferee by virtue of the
amalgamation.
3. The business of transferor company is intended to be
carried on, after the amalgamation by the transferee
company.
4.The consideration for amalgamation receivable by those
equity shareholders of the transferor company who agree to
become equity shareholders of the transferee company is
discharged by the transferee company wholly by issue of equity
shares in the company, except that cash may be paid in
respect of any fractional shares.
5. No adjustment is intended to be made to the book values of
the assets and liabilities of the transferor company when they
are incorporated in the financial statements of the transferee
company except to ensure uniformity of accounting policies.

In this way there is a pooling of assets and liabilities of the

combining companies under amalgamation. It must be ensured
that the resultant figures of the assets, liabilities, capital and
reserve of the combining entity more or less represent the
addition of the relevant figures of the amalgamation entities.
Amalgamation in the nature of Purchase
An amalgamation in nature of purchase takes place
when any one or more of the conditions specified
for the amalgamation in nature of merger is not
satisfied.
Under this nature of amalgamation one company
acquires another company and equity
shareholders of the combining entities do not
continue to have proportionate share in the
equity of the combined entity or the business of
the combined entity is not intended to be
combined after amalgamation.
Absorption
When one or more existing companies go into liquidation
and some existing company buys the business, it is
known as absorption.
The major characteristics of the absorption are as
follows :
1.There is no formation of any new company.
2.There is an absorption of one or more existing
companies by one existing company.
3.There is only liquidation of absorbed company while
the absorbing company retains its legal entity.
External Reconstruction
External reconstruction is effected by liquidating the
company. It is just like by absorption.
In it a new company is formed to purchase the business
of an existing company.
The assets and liabilities of the existing company are
transferred to the newly formed company.
X ltd goes into liquidation and a new company Y ltd
comes into existence to take over the business of X ltd,
this is the case of the External Reconstruction.
Difference between Amalgamation,
Absorption & Reconstruction
Basis No of Amalgamation Absorption Reconstruction
Distinction
1.Formation of a New company is No new company New company is
New Company. formed in a is formed in formed in
Amalgamation. absorption. External
Reconstruction.
2.No Liquidating At least two At least one One company is
Companies companies wind company is required to wind
up their business. required to wind up its business.
up its business.

3.Objective The aim of the Generally weaker The aim of the

amalgamation is units are taken external
to remove the over by strong reconstruction is
competition units to write off the
among the accumulated
entities. losses and
fictitious assets.
Differences
Basis No of Amalgamation Absorption Reconstruction
Distinction
4.Position of The position of The position of The position of
companies the companies is purchasing vendor company
almost same. company is is bad because of
comparatively accumulated
better than vendor losses and
company. fictitious assets.
Purchase Consideration
Purchase Consideration refers to the amount paid by the
purchasing company to the vendor company for the
purchase of business.
The purchase consideration for amalgamation includes the
shares and other securities issued and payment made
in cash or other assets by the transferee company to the
shareholders of transferor company.
It should not include the amount of liabilities taken over
by transferee company, which will be paid directly by
this company.
Payments made to debenture holders should not be
considered as part of purchase consideration .
Methods of Purchase Consideration
1. Lump sum Method
2. On basis of Value of Shares or Shares Exchange Method
3. Net Payment Method.
4. Net Worth or Net Assets Method.
Lump sum Method
Under this method, purchased consideration is specified at
a particular figure and goodwill or capital reserve is
arrived at on the basis of this figure.
For example, a Company ABC ltd purchase the business of
the company XYZ ltd at an agreed price of Rs.10,00,000
in all. Here the amount of Rs. 10,00,000 is the purchase
consideration.
On basis of Value of Shares or Shares
Exchange Method
Under this method, the purchase consideration is required
to be calculated on the basis of intrinsic value of
shares.
Intrinsic value is calculated by dividing the net assets
available for equity shareholders by the number of equity
shares.
This value determines the ratio of exchange of the
shares between the transferee and transferor
companies.

Intrinsic value of share = Net assets

available for Equity Shareholders
Number of equity shares
E.g. Suppose A ltd and B ltd are two companies involved in
same business. Their capital is Rs. 6,00,000 and Rs.
2,00,000 (each of Rs.10).The two companies arrived to
amalgamate in AB ltd. If each share of A ltd and B ltd is
valued at Rs. 10 and Rs. 20 respectively for the purpose of
amalagmation, the purchase consideration will be as under :
A ltd B ltd
60000 [email protected] 600000 -
20000 [email protected] - 400000

Note: While issuing shares to individual shareholders of the

selling company, these may be in fractions. A company
cannot issue shares in fraction but it can issue fractional
certificates or coupons or pay cash for the fractions.
3.Net Payment Method.

Under this method the purchase consideration is arrived at by merely adding

every component of purchase consideration in respect of which the
purchasing company makes payment.
The following Points should be considered at the time of calculation of
purchase consideration:
1.The assets & liabilities taken over by the transferee co. are not to be
considered.
2. Any payment whether in cash or shares made by the transferee co. for
shareholders must be considered.
3. If creditors and debtors are taken over by transferee co. to discharge
subsequently such amount should not be considered in purchase
consideration.
4. If the liquidation expenses of the transfer co. are to be born by transfer co.,
these should not be increased in purchase consideration.
5. Any payments made by the transferee co. to some other party on behalf of
the transferor co. are to be ignored.
6. When liabilities are taken over by transferee co. they are neither added or
deducted to the amount of purchase consideration.
4.Net Worth or Net Assets Method.
Under this method, purchase consideration is the
difference between the value of the assets taken over
and the liabilities assumed.
Net asset or Net worth =
Assets taken over – Liabilities assumed
(at agreed value) (at agreed value)
Important points to be considered :
 Assets taken over by purchasing Co. should be valued at agreed price.
 All assets means not just the tangible assets e.g. cash and bank but the
intangible assets e.g. goodwill, trademarks etc. all taken at agreed
value.
 The liabilities assumed by purchasing company are deducted at their
agreed value. The term liabilities does not include undistributed
profits like reserve fund ,general fund, share premium, insurance
fund.
 The consideration for the amalgamation should include any non-cash
element at fair value. In case of issue of securities, the value fixed by
the statutory authorities may be taken to be their fair value.
 Where the scheme of amalgamation provide for an adjustment to the
consideration contingent on one or more future events, the amount of
additional payment should be included in the consideration if
payment is probable and a reasonable estimate of the amount can be
made.
The following entries should be passed in the books of transferor
and transferee companies in the case of amalgamation

In books of Transferor co.

1. For transferring assets taken over by the transferee company.
Realisation a/c Dr.
To Various assets (individually)(at book value)
Note : Assets on which some provisions has been made are to be transferred to
realisation account at their gross figures and provisions made should be
transferred along with liabilities.

2. For transferring liabilities taken over by the transferee company.

Various liabilities a/c Dr. (at book value)
To Realisation a/c
Note: Only those liabilities are to be transferred which have been assumed by the
transferee co. If there is any fund which partially represents liability and
partially represents undistributed profit, then that portion which represents
liability should be transferred to realisation a/c.
3. For Purchase consideration
Transferee Company’s a/c Dr.
To Realisation a/c
4. For receiving PC from the transferee Co.
Bank a/c Dr.
Shares in transferee Co. a/c Dr.
To Transferee Co a/c
5.For assets sold bt the transferor co. not taken over by the transferee
co.
Bank a/c Dr.
Realisation a/c (if loss on sale of assets)Dr.
To Assets a/c
To Realisation a/c (if profit on sale of assets)
6. For Liquidation Expenses
(a) If expenses are to be met by transferor co.
Realisation a/c Dr.
To Bank a/c
(b)If Expenses are to be met by transferee co. there are two alternatives :
First alternative : No entry
Second alternative :
(i)Transferee Co. a/cDr.
To Bank a/c
(ii) Bank a/c Dr.
To Transferee co.’s a/c
7. For liabilities not taken over by the transferee co. when paid by the
transferor co.
Various liabilities a/c Dr.
Realisation a/c (if excess payment is made)
To Bank a/c
or
To Shares in transferee Co. a/c
To realisation a/c (if less payment is made)
8. For transferring preference share capital
Preference share capital a/c ..Dr.
Realisation a/c(if excess is to paid) ..Dr.
To Preference Shareholders a/c
To Realisation a/c (if less is to be paid)
9. Preference Share Holders ..Dr.
To equity/Preference Shares of transferee co.

Note : If the arrears of the dividend are to be paid to

preference Shareholders, then such excess amount should
be debited to realisation a/c and credited to preference
shareholders a/c. If the preference shareholders have
agreed to get less than the amount of capital, then reverse
entry is to be passed.
10. For closing Realisation a/c
(a) If profit
Realisation a/c ..Dr.
To equity Shareholders a/c
(b) If Loss
Equity shareholders a/c ..Dr
To Realisation a/c

11. For transferring equity share capital and accumulated profit

Equity Share Capital a/c ..Dr.
General reserve a/c..Dr.
Debenture Redemption Fund a/c ..Dr.
Dividend equilisation Reserve a/c ..Dr.
Securities Premium a/c ..Dr.
Profit & Loss a/c ..Dr.
Accident Compensation Fund a/c ..Dr.
(to the extent it does not denote the liability)
Shares Forfeited a/c ..Dr.
Profit Prior to incorporation a/c ..Dr.
Any other reserve or Fund a/c ..Dr
To Equity shareholders a/c
12. For transferring accumulated losses and expenses not
writtenoff
Equity shareholders a/c ..Dr.
To Profit & Loss a/c ( Debit balance)
To Discount or exp on issue of shares or
debentures a/c
To Preliminary Expenses
To Underwriting commission

13. For paying Shareholders

Equity Shareholders a/c ..Dr.
To Bank or Shares in Transferee co. a/c
Accounting entries in books of transferee Co.
There are two methods of accounting for amalgamation in
the books of transferee company :
1.The pooling of Interest Method
2.The purchase Method
Pooling of Interest method
The following journal entries are to be passed in books of transferee
co. for incorporating the financial statements of the transferor co:
(1) On amalgamation of business
Business Purchase a/c ..Dr.(with amt of PC)
To Liquidators of Transferee Co. a/c
(2) For recording assets & liabilities taken over
Sundry assets(individually) (Book Value)

To Sundry Liabilities(individually) (Book Value)

To Reserves a/c (Book Value)

To Business Purchase a/c (Book Value)

Note :The difference between debits & credits is adjusted in the

reserves of transferee company.
Instead Of passing Two entries, one combined entry can be passed.
Sundry assets a/c ..Dr
To Sundry Liabilities
To Different reserves of transferee co
To Liquidators of transferor Co.

(3) For making payment to the liquidator of transferor co.

Liquidators of transferor Co. a/c Dr.
To Bank/Share Capital/Security Premium

(4) If Liquidation expenses are paid by the transferee company.

General reserve or Profit & Loss a/c Dr.
To Bank a/c

(5) For formation expenses of the transferee co.

Preliminary Expenses a/c Dr.
To Bank a/c
Purchase Method
The following Journal entries are passed in the books of
transferee company for incorporation of the financial
statements of the transferor co.
(1) For purchase of business from the transferor company :
Business Purchase a/c ..Dr. (For PC)
To Liquidation of transferor co.
(2) For recording assets & liabilities taken over
Various assets a/c ..Dr. (at revised value, if any otherwise at
book value)
To various Liabilities a/c (with figures at which they are
taken over)
To Business Purchase a/c
Note : If credit is more than debit it is debited to Goodwill a/c but if
the debit is more than credit then it is credited to capital reserve
a/c.
(3) For making payment to the liquidator of the vendor company :
Liquidators of transferor co. a/c ..Dr
To Bank a/c
To Share Capital a/c

(4) When Statutory Reserve is maintained

Amalgamation adjustment a/c ..Dr
To Statutory Reserve a/c

(5) If liquidation exp are paid by transferee co.

Goodwill a/c ..Dr
To Bank

(6) For Formation exp of transferee co.

Preliminary Expenses a/c ..Dr
To Bank a/c
(7) When goodwill is written off against Capital reserve
Capital reserve a/c ..Dr.
To Goodwill a/c

(8) If any liability is discharged by the transferee company

Respective Liability a/c ..Dr. (with payable amount)
To Share capital/debentures/bank a/c
 Distinguish between Amalgamation in
nature of merger and Amalgamation in
nature of purchase
In nature of Merger In nature of Purchase
1. In this case transferee co. must 1.Transferee co may or may not acquire
acquire whole business of the all assets and liabilities of the
transferor co which includes all assets transferor co.
and liabilities of the transferor
company.
2. Shareholders having 90% of the 2.This condition is not applicable in
face value of equity shares of case of amalgamation in the nature of
transferor co become the equity purchase.
shareholders of the transferee co.
3.The claim of equity shareholders of 3.The claim of equity shareholders of
the transferor co must be discharged transferor company may be discharged
by transferee co by issuing equity by issuing equity shares or cash.
shares only, except in case of fractional
shares.
 In nature of merger In nature of purchase

4.All assets & liabilities of the 4. Assets & Liabilities of transferor co

transferor co are taken over by may be taken at book value or agreed
transferee co at book value as shown value, as per their agreement.
by the balance sheet of the transferor
co on the date of amalgamation.
5. Difference between purchase 5. Such difference is taken as goodwill
consideration and net worth is taken or capital reserve as the case may be.
as general reserve or net profit and
loss a/c.
Reference:

Monga J.R, Corporate Accounting

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