Advanced Corporate Accounting IV B.

com (NEP)
Chapter – 1: Mergers and Acquisition of Companies
Amalgamation (Merger): Accounting Standard (AS) 14 issued by the Council of the Institute of Chartered
Accountants of India deals with ‘Accounting for Amalgamations’. This standard will come into effect in
respect of accounting periods commencing on or after 1.4.1995 and will be mandatory in nature.
Meaning: Amalgamation is the process in which two or more existing companies doing their business in a
similar line join and start new company with new name and identity and dissolves the existing companies.
Definitions: The following terms are used in the Accounting Standard -14 with the meanings specified:

Amalgamation: Amalgamation means an amalgamation pursuant to the provisions of the Companies Act,
1956 or any other statute, which may be applicable to companies.
Transferor Company: Transferor Company means the company, which is amalgamated into another
company.
Transferee Company: Transferee Company means the company into which a transferor company is
amalgamated.
Reserves: Reserve means the portion of earnings, receipts or other surplus of an enterprise (whether capital
or revenue) appropriated by the management for a general or a specific purpose other than a provision for
depreciation or diminution in the value of assets or for a known liability.
Statutory Reserve: Statutory Reserve refers to the reserves to be maintained as per the requirements of
Companies Act or any other law or legislation only in case of amalgamation in the nature of purchase.

Statutory Reserves include:

1) Investment Allowance Reserve.
2) Development Rebate Reserve.
3) Workmen Compensation Fund.
4) Foreign Project Reserve.
5) Export Profit Reserve, etc.

Treatment of Statutory Reserve: Statutory reserve must be treated like any other liability in the realization
account in the books of Transferor Company. In the books of transferee company, to the extent of statutory
reserve must be transferred to “Amalgamation Adjustment Account” and shown in the balance sheet under
the head “Miscellaneous Expenses”.
Journal Entry: Amalgamation Adjustment A/c Dr
To Statutory Reserve A/c
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Types of Amalgamation:
The Companies Act, 1956 has not specifically defined ‘amalgamation’. However, from several legal
decisions, the definition of amalgamation may be inferred. The ICAI has introduced AS-14 on “Accounting
for Amalgamation”. The standard recognizes two types of amalgamation, namely:
1. Amalgamation in the nature of merger and
2. Amalgamation in the nature of purchase.

Amalgamation in the Nature of Merger:

Amalgamation in the nature of merger is an amalgamation which satisfies all the following conditions:
1. All the assets and liabilities of the transferor company become, after amalgamation, the assets and
liabilities of the transferee company.
2. Shareholders holding not less than 90% of the face value of the equity shares of the transferor
company (other than the equity shares already held therein, immediately before the amalgamation,
by the transferee company or its subsidiaries or their nominees) become equity shareholders of the
transferee company by virtue of the amalgamation.
3. The consideration for the 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 the issue of equity shares in the transferee company, except that cash
may be paid in respect of any fractional shares.
4. The business of the transferor company is intended to be carried on, after the amalgamation, by the
transferee company.
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 short, Amalgamation in the Nature of Merger is an amalgamation which satisfies the following
conditions:
1. The Transferor Company must take over all the assets and all the liabilities of the transferor
company.
2. Assets and Liabilities of the transferor company will be taken over by the transferee company at
their book value.
3. The transferee company must carry on the same nature of business as that of the transferor company.
4. At least 90% of the Equity Shareholders of the transferor company must agree to become the
shareholders of the transferee company.
5. The transferee company must discharge the amount of Purchase consideration by issuing its Equity
Shares to the Equity Shareholders of the transferor Company and if there is any Fraction it would be
paid in Cash.

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Amalgamation in the Nature of Purchase:
Amalgamation in the nature of purchase is an amalgamation which does not satisfy any one or more of the
conditions specified above.
Methods of Accounting for Amalgamations: There are two main methods of accounting for
amalgamations:
1. The Pooling of Interest Method and
2. The Purchase Method.
The use of the pooling of interest method is confined to circumstances which meet the criteria referred to in
paragraph 3(e) for an amalgamation in the nature of merger. The objective of the purchase method is to
account for the amalgamation by applying the same principles as are applied in the normal purchase of
assets. This method is used in accounting for amalgamations in the nature of purchase.
Pooling Interest Method: Under the pooling of interest method, the assets, liabilities and reserves of the
transferor company are recorded by the transferee company at their existing carrying amounts (after making
the adjustments required in paragraph 11).
The Purchase Method: Under the purchase method, the transferee company accounts for the amalgamation
either by incorporating the assets and liabilities at their existing carrying amounts or by allocating the
consideration to individual identifiable assets and liabilities of the transferor company on the basis of their
fair values at the date of amalgamation. The identifiable assets and liabilities may include assets and
liabilities not recorded in the financial statements of the transferor company.

Different features of Pooling of Interest and Purchase Methods

Point of Difference Pooling of Interest Method Purchase Method
1. Applicability The method is applicable for The method is applicable for
amalgamation in the nature of amalgamation in the nature of purchase.
merger.
2. Incorporation of All Assets and liabilities of Only net assets taken over are
Assets and transferor company are incorporated incorporated in the books of transferee
Liabilities in the books transferee company at company at agreed values.
book values.
3. Incorporation of Reserves and P&L of the transferor Reserves and P&L of the transferor
Reserves and P&L company are incorporated in the company are not incorporated in the books
Account books transferee company. transferee company.

4. Goodwill and The difference between Purchase The difference between Purchase
Capital Reserves Consideration and value of assets is Consideration and value of assets is either
adjusted in general reserves but not goodwill or capital reserve.
in goodwill or capital reserve.
5. Amalgamation No such account is necessary. It is necessary to record the statutory
Adjustment A/c reserves maintained by transferor
company.

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Purchase Consideration:
Meaning: Purchase consideration is the purchase price payable by the transferee company to the transferor
company for taking over the business of the transferor company.

Definition: Para 3(g) of AS 14 defines the term purchase consideration as “the aggregate of the shares and
other securities issued and the payment made in the form of cash or other assets by the transferee company
to the shareholders of the transferor company”.
Note: As per AS 14 Payments made to debenture-holders should not be considered as part of purchase
consideration.
Methods of Calculation of Purchase Consideration: The amount of purchase consideration is determined
by the following methods:
1. Lump-sum Method.
2. Net Asset Method.
3. Net Payments Method and
4. Shares Exchange Ratio Method.
1. Lump-sum Method: When the transferee company agrees to pay a lump-sum amount or fixed sum to
the transferor company, it is called lump-sum payment of purchase consideration.
2. Net Asset Method: According to this method, the purchase consideration is calculated by calculating the
net worth of the assets taken over by the transferee company. The net worth is arrived at by adding the
agreed value of assets taken over by the transferee company minus agreed value of liabilities to be assumed
by the transferee company.
Purchase Consideration
Agreed Value of Assets Taken Over by Transferee Company xxxx
Less: Agreed Value of Liabilities Taken Over by Transferee Company xxxx
Purchase Consideration xxxx
3. Net Payment Method: Under this method, purchase consideration is calculated by adding the various
payments in the form of shares, securities, cash, etc. made by the transferee company.
Purchase consideration
Equity Shares in Transferee Company xxxx
Preference Shares in Transferee Company xxxx
Cash xxxx
Purchase Consideration xxxx
Note: In this case, the value of assets and liabilities taken over by the purchasing company need not be taken
into account. Only payments are to be added to arrive at the amount of purchase consideration.
4. Shares Exchange Ratio Method: Under this method purchase consideration is required to be calculated
on the basis of intrinsic value of shares. The intrinsic value of share is calculated by dividing the net assets
available for equity shareholders by number of equity shares.
Discharge of Purchase Consideration:
Discharge of purchase consideration refers to the form in which the purchasing company is discharged by
company.
Accounting Treatment:

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Accounting treatment in the books of Transferor Company:
In the books of Transferor Company, the following entries are made on account of its being wound up:
JOURNAL ENTRIES
SL.NO Particulars Dr Cr
For Transfer of Assets to Realization Account:
Realization A/c Dr
1 To Sundry Assets A/c
(Note: Except Cash if it is not taken over by transferee company)
For Transfer of Liabilities:
Sundry Liabilities A/c Dr
To Realization A/c xxxx
2 Note: Share Capital, Reserves and P&L A/c Balances should not be transferred xxxx
to realization a/c
For Purchase Consideration Due:
Transferee Company A/c Dr xxxx
3
To Realization A/c xxxx
For Receipt of Purchase Consideration:
E. Shares in Transferee Co., A/c Dr xxxx
P. Shares in Transferee Co., A/c Dr xxxx
4
Cash A/c Dr xxxx
To Transferee Company A/c xxxx
For Realization of Assets Not Taken Over by Transferee Company:
Ban A/c Dr xxxx
5 To Realization A/c xxxx
For Payment of Liabilities Not Taken Over by Transferee Company:
6 Realization A/c Dr xxxx
To Bank A/c xxxx
For Payment of Realization/Liquidation Expenses:
Case 1: If Paid by Transferor Co: xxxx
Realization A/c Dr
To Bank A/c xxxx
Case 2: If Paid by Transferee Co:
First Alternative: No Entry
7
Second Alternative:
1. Transferee Co., A/c Dr xxxx
To Bank A/c xxxx
2. Bank A/c Dr xxxx
To Transferee Co., A/c xxxx
For Premium on Repayment of Preference Share Capital:
Realization A/c Dr xxxx
8 To Preference Shareholders A/c xxxx
For Discount on Repayment of Preference Share Capital:
Preference Shareholders A/c Dr xxxx
9 To Realization A/c xxxx

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For Transfer of Profit on Realization:
Realization A/c Dr xxxx
10 (A) To Equity Shareholders A/c xxxx
For Transfer of Loss on Realization:
10 (B) Equity Shareholders A/c Dr xxxx
To Realization A/c xxxx
Shareholders Account Entries
For Transfer of Share Capital and Accumulated Profits:
Equity Share Capital A/c Dr xxxx
General Reserves A/c Dr xxxx
P&L A/c Dr xxxx
Debenture Redemption Fund A/c Dr xxxx
Dividend Equalization Reserve A/c Dr xxxx
11 Securities Premium A/c Dr xxxx
Accident Compensation Fund A/c Dr xxxx
Share Forfeiture A/c Dr xxxx
Profit Prior to Incorporation A/c Dr xxxx
Any other Reserves A/c Dr xxxx
To Equity Shareholders A/c xxxx

For Transfer of Fictitious Assets, Accumulated Losses to Equity

Shareholders A/c:
Equity Shareholders A/c Dr xxxx
To P&L A/c (Debit Bal) xxxx
12 To Discount on issue of shares A/c xxxx
To Discount on issue of debentures A/c xxxx
To Preliminary Expenses A/c xxxx
To Underwriting Commission A/c xxxx
For Final Payment to Equity Shareholders:
Equity Shareholders A/c Dr xxxx
13 To Shares in Transferee Co., A/c xxxx
To Cash or Bank A/c xxxx
For Transfer of Preference Share Capital to Preference Shareholders A/c:
14 Preference Share Capital A/c Dr xxxx
To Preference Shareholders A/c xxxx
For Final Payments to Preference Shareholders:
Preference Shareholders A/c Dr xxxx
Realization A/c (Premium) Dr xxxx
15 To Realization A/c (Discount) xxxx
To Shares in Transferee Co., A/c xxxx
To Cash/Bank A/c xxxx

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LEDGER ACCOUNTS IN THE BOOKS OF TRANSFEROR COMPANY:
In the books of Transferor Company, the following ledger accounts are prepared:
1) Realization Account.
2) Transferee Company Account.
3) Equity Shareholders Account.
4) Preference Shareholders Account.
5) Cash/Bank Account.

Realization Account: Realization account is a nominal account, which is prepared to find out the profit or
loss on realization of assets and payment of liabilities at the time of amalgamation, absorption and external
reconstruction of companies.

Dr REALISATION ACCOUNT Cr
Particulars Rs Particulars Rs
To Sundry Assets A/c xxxx By Sundry Liabilities A/c: xxxx
(At Book values except Cash, if it is not (Transfer of Liabilities except Share Cap,
taken over by Transferee Co.,) Reserves and other Accumulated Profits)
To Bank A/c: xxxx By Transferee Company A/c: xxxx
(Payment of Liabilities not taken over (Purchase Consideration Due)
by Transferee Co., and Liquidation By Bank A/c: xxxx
Expenses) (Realisation or Sale of Assets not taken
To Preference Shareholders A/c: xxxx over by Transferee Co.,)
(Premium on repayment of preference By Preference Shareholders A/c: xxxx
share capital) (Discount on repayment of preference
To Equity Shareholders A/c: xxxx share capital)
(Transfer of Profits) By Equity Shareholders A/c: xxxx
(Transfer of Losses)
xxxx xxxx

Dr TRANSFEREE COMPANY ACCOUNT Cr

Particulars Rs Particulars Rs
To Realization A/c: xxxx By Equity Shares in Transferee Company xxxx
(Purchase Consideration) By Preference Shares in Transferee
Company xxxx
By Cash xxxx
xxxx xxxx

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Dr EQUITY SHAREHOLDERS ACCOUNT Cr

Particulars Rs Particulars Rs
To P&L A/c (Debit Bal) xxxx By Equity Share Capital A/c xxxx
To Discount on issue of shares xxxx By General Reserves A/c xxxx
To Discount on issue of debentures A/c By P&L A/c xxxx
To Preliminary Expenses xxxx By Debenture Redemption Fund xxxx
To Underwriting Commission xxxx By Dividend Equalization Reserve xxxx
To Realization A/c: xxxx By Securities Premium xxxx
(Purchase Consideration) xxxx By Accident Compensation Fund xxxx
By Share Forfeiture xxxx
By Profit Prior to Incorporation xxxx
By Any other Reserves A/c xxxx
By Realization Account (Profit ) xxxx
xxxx xxxx

Dr PREFERENCE SHAREHOLDERS ACCOUNT Cr

Particulars Rs Particulars Rs
To Realization A/c xxxx By Preference Share Capital A/c
(Discount on Repayment) By Realization A/c xxxx
To Shares in Transferee Company xxxx
xxxx (Premium on Repayment)
To Cash xxxx
xxxx xxxx

Dr CASH/BANK ACCOUNT Cr
Particulars Rs Particulars Rs
To Balance b/d xxxx By Realization A/c xxxx
To Realization A/c xxxx (Payment of Liabilities not taken over xxxx
(Sale of Assets not taken over) and liquidation expenses)
To Transferee Company A/c xxxx By Equity Shareholders A/c xxxx
(Purchase Consideration Cash) xxxx By Preference Shareholders A/c xxxx

xxxx xxxx

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ACCOUNTING TREATMENT IN THE BOOKS OF TRASFEREE COMPANY
(IN CASE OF AMALGAMATION IN THE NATURE OF PURCHASE)
The following entries are made in the books of Transferee Company as per AS 14 in case of amalgamation
in the nature of purchase:
JOURNAL ENTRIES
SL.NO Particulars Dr Cr
1. For Purchase Consideration Due:
Business Purchase A/c Dr xxxx
To Liquidator of Transferor Co., A/c xxxx
2. For Incorporating Assets and Liabilities Taken Over:
Various Assets A/c Dr xxxx
(at revised or agreed values if any, otherwise at book values)
Goodwill A/c (B/F) Dr xxxx
To Various Liabilities A/c (at taken over values) xxxx
To Business Purchase A/c (PC) xxxx
To Capital Reserve A/c (B/F, if any) xxxx
3. For Incorporation of Statutory Reserves:
Amalgamation Adjustment A/c Dr xxxx
To Statutory Reserve A/c xxxx
4. For Discharge of Purchase Consideration:
Liquidator of the Transferor Company A/c Dr xxxx
To Equity Share Capital A/c xxxx
To Preference Share Capital A/c xxxx
To Securities Premium A/c xxxx
To Cash/Bank A/c xxxx
5. For making payments to Debentures:
Debentures in Transferor Company A/c Dr xxxx
To Debentures in Transferee Company A/c xxxx
6. For Liquidation Expenses paid by Transferee Company:
Goodwill A/c Dr xxxx
To Bank A/c xxxx
For Formation Expenses paid by Transferee Company:
Preliminary Expenses A/c Dr xxxx
7. To Bank A/c xxxx
8. For Writing Off Goodwill against Capital Reserve:
Capital Reserve A/c Dr xxxx
To Goodwill A/c xxxx
9. For Discharge of any Liability by the Transferee Co.,:
Respective Liability A/c Dr xxxx
To Bank A/c xxxx
To Share Capital/Debentures A/c

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10. For Fresh Issue of Shares/Debentures:

Bank A/c Dr xxxx
To Share Capital A/c xxxx
To Debentures A/c xxxx

ACQUISITON: Acquisition is the process in which one existing company takes over the other existing
company and merges as a single unit. The company or companies whose business is taken over are
liquidated. In other words, Acquisition refers to purchase of an existing company by another existing
company. Accounting Standard AS-14 is not applicable to acquisition of companies.

Accounting Treatment: Accounting treatment in case of Acquisition is same as discussed in the case of
Amalgamation of Companies.

External Reconstruction: External Reconstruction is the process in which one existing company
reconstructs itself with new name and identity. In other words, External Reconstruction refers to
Closing/liquidating an existing company and starting it again afresh or anew.

Accounting Treatment: Accounting treatment in case of External Reconstruction is same as discussed in

the case of Amalgamation of Companies.

DIFFERENCES BETWEEN MERGER AND ACQUISITION OF COMPANIES

BASIS AMALGAMATION ACQUISITION
Meaning Two or more companies wound up and a new In this case, an existing company takes
company is formed to take over their business. over the business of one or more
existing companies.
Number of Two or more companies are wound up. An existing company takes over the
Companies business of one or more existing
involved companies.
Number of Two companies are wound up to form a single No new resultant company is formed.
resultant resultant company.
companies.
Example A Ltd and B Ltd Amalgamate to form C Ltd. A Ltd takes over the business of
another existing B Ltd.

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