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
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 Amalgamati Absorption Reconstructi
Distinction on on
1.Formation of New company No new New company
a New is formed in a company is is formed in
Company. Amalgamation formed in External
. absorption. Reconstructio
n.
2.No At least two At least one One company
Liquidating companies company is is required to
Companies wind up their required to wind up its
business. wind up its business.
business.

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

amalgamation weaker units external
is to remove are taken over reconstruction
the by strong is to write off
competition units the
among the accumulated
entities. losses and
Differences
Basis No of Amalgamati Absorption Reconstructi
Distinction on on
4.Position of The position The position The position
companies of the of purchasing of vendor
companies is company is company is
almost same. comparatively bad because
better than of
vendor accumulated
company. losses and
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/c Dr.
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
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
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
(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. 1.Transferee co may or may not
must acquire whole acquire all assets and liabilities
business of the transferor of the transferor co.
co which includes all assets
and liabilities of the transferor
company.
2. Shareholders having 90% 2.This condition is not
of the face value of equity applicable in case of
shares of transferor co amalgamation in the nature of
become the equity purchase.
shareholders of the transferee
co.
3.The claim of equity 3.The claim of equity
shareholders of the shareholders of transferor
transferor co must be company may be discharged by
discharged by transferee co issuing equity shares or cash.
 In nature of merger In nature of purchase

4.All assets & liabilities of 4. Assets & Liabilities of

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

Monga J.R, Corporate Accounting

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