ICAI Notes: Amalgamation of Companies | Advanced Accounting for CA Intermediate PDF Download

 Page 1


 
 
 
 
LEARNING OUTCOMES 
   
 
CHAPTER 
13 
 
 
AMALGAMATION OF 
COMPANIES  
After studying this chapter, you will be able to: 
? Understand the term “Amalgamation” and the methods of accounting 
for amalgamations. 
? Appreciate the concept of transferee Company and the transferor 
company. 
? Meaning of purchase consideration and Calculation of Purchase 
consideration under various Methods. 
? Pass the entries to close the books of the vendor company. 
? Pass the journal entries in the books of purchasing company to 
incorporate the assets and liabilities of the vendor company and also 
giving effect to other adjustments. 
? Preparation of Balance sheet of transferee company after 
Amalgamation. 
  
© The Institute of Chartered Accountants of India
Page 2


 
 
 
 
LEARNING OUTCOMES 
   
 
CHAPTER 
13 
 
 
AMALGAMATION OF 
COMPANIES  
After studying this chapter, you will be able to: 
? Understand the term “Amalgamation” and the methods of accounting 
for amalgamations. 
? Appreciate the concept of transferee Company and the transferor 
company. 
? Meaning of purchase consideration and Calculation of Purchase 
consideration under various Methods. 
? Pass the entries to close the books of the vendor company. 
? Pass the journal entries in the books of purchasing company to 
incorporate the assets and liabilities of the vendor company and also 
giving effect to other adjustments. 
? Preparation of Balance sheet of transferee company after 
Amalgamation. 
  
© The Institute of Chartered Accountants of India
ADVANCED ACCOUNTING 
 
 
 
 13.2 
This chapter deals with accounting for amalgamations and the treatment of any 
resultant goodwill or reserves. Amalgamation means an amalgamation pursuant 
to the provisions of the Companies Act 2013 or any other statute which may be 
applicable to companies.  
 
1. INTRODUCTION 
In today’s modern world, we are witnessing, the rise of different business ideas 
every other day.  This has attributed to the immense increase in the competition. 
Some of the shrewd businesses survive through this cut throat competition, 
whereas some of them are wiped out due to the dynamics of this very 
competition. 
Like the strategies to set up businesses, there has been wide increase in realizing 
the need to stay in the business through the different difficult market situations. 
Hence, the business world has also seen the growing importance of business-
saving strategies.  
There can be different strategies to ensure the business continues to exist, or 
existing companies find ways to increase market share by eliminating the 
competitors or to come out of financial crisis by restructuring the present capital 
structure and the like. 
 
Types of Amalgamation
Amalgamation in the nature of 
merger 
Amalgamation in the nature of 
purchase
 CHAPTER OVERVIEW 
© The Institute of Chartered Accountants of India
Page 3


 
 
 
 
LEARNING OUTCOMES 
   
 
CHAPTER 
13 
 
 
AMALGAMATION OF 
COMPANIES  
After studying this chapter, you will be able to: 
? Understand the term “Amalgamation” and the methods of accounting 
for amalgamations. 
? Appreciate the concept of transferee Company and the transferor 
company. 
? Meaning of purchase consideration and Calculation of Purchase 
consideration under various Methods. 
? Pass the entries to close the books of the vendor company. 
? Pass the journal entries in the books of purchasing company to 
incorporate the assets and liabilities of the vendor company and also 
giving effect to other adjustments. 
? Preparation of Balance sheet of transferee company after 
Amalgamation. 
  
© The Institute of Chartered Accountants of India
ADVANCED ACCOUNTING 
 
 
 
 13.2 
This chapter deals with accounting for amalgamations and the treatment of any 
resultant goodwill or reserves. Amalgamation means an amalgamation pursuant 
to the provisions of the Companies Act 2013 or any other statute which may be 
applicable to companies.  
 
1. INTRODUCTION 
In today’s modern world, we are witnessing, the rise of different business ideas 
every other day.  This has attributed to the immense increase in the competition. 
Some of the shrewd businesses survive through this cut throat competition, 
whereas some of them are wiped out due to the dynamics of this very 
competition. 
Like the strategies to set up businesses, there has been wide increase in realizing 
the need to stay in the business through the different difficult market situations. 
Hence, the business world has also seen the growing importance of business-
saving strategies.  
There can be different strategies to ensure the business continues to exist, or 
existing companies find ways to increase market share by eliminating the 
competitors or to come out of financial crisis by restructuring the present capital 
structure and the like. 
 
Types of Amalgamation
Amalgamation in the nature of 
merger 
Amalgamation in the nature of 
purchase
 CHAPTER OVERVIEW 
© The Institute of Chartered Accountants of India
 
 
    
 
 13.3 
 
AMALGAMATION OF COMPANIES 
 
Such strategies are termed using different words like “corporate marriages”, 
“strategic alliances”, “business partnering”, etc. The same has been defined in the 
Accounting Standard 14 (AS 14). 
In this chapter we shall understand the terms, meanings, methods, accounting 
treatments related to amalgamation in detail. 
2. MEANING OF AMALGAMATION 
Amalgamation refers to the process of merger of two or more companies into a 
single entity or where one company takes over the other by outright purchase. 
Therefore, the term ‘amalgamation’ contemplates two kinds of activities:  
(i) two or more companies join to form a new company (Popularly known as 
Amalgamation) or 
(ii)  absorption and blending of one by the other (Popularly known as 
Absorption).  
As discussed, this arrangement is sought by companies to receive various 
advantages such as economies of large-scale production, avoiding competition, 
increasing efficiency, expansion, increase in market share, etc.  
In amalgamation we have generally two companies called as – 1) vendor or 
Transferor Company and 2) Vendee or Transferee Company. Let us understand 
the concepts through the following examples- 
Example 1- Company A and Company B amalgamate to form Company C. 
Company A and Co B are called transferor companies and Company C is called as 
the transferee company- this strategy is called as AMALGAMATION. 
Example 2- Company A is taken over by Company B (purchased). Here, Company 
A is called as Transferor Company and Company B is Transferee Company. This 
strategy is called as ABSORPTION. 
Example 3- Company A has been suffering from losses for past 5 years, a new 
Company B is floated to take over the existing Company A. Here, Company A is 
the transferor company and Company B is Transferee Company. This strategy is 
termed as EXTERNAL RECONSTRUCTION. 
© The Institute of Chartered Accountants of India
Page 4


 
 
 
 
LEARNING OUTCOMES 
   
 
CHAPTER 
13 
 
 
AMALGAMATION OF 
COMPANIES  
After studying this chapter, you will be able to: 
? Understand the term “Amalgamation” and the methods of accounting 
for amalgamations. 
? Appreciate the concept of transferee Company and the transferor 
company. 
? Meaning of purchase consideration and Calculation of Purchase 
consideration under various Methods. 
? Pass the entries to close the books of the vendor company. 
? Pass the journal entries in the books of purchasing company to 
incorporate the assets and liabilities of the vendor company and also 
giving effect to other adjustments. 
? Preparation of Balance sheet of transferee company after 
Amalgamation. 
  
© The Institute of Chartered Accountants of India
ADVANCED ACCOUNTING 
 
 
 
 13.2 
This chapter deals with accounting for amalgamations and the treatment of any 
resultant goodwill or reserves. Amalgamation means an amalgamation pursuant 
to the provisions of the Companies Act 2013 or any other statute which may be 
applicable to companies.  
 
1. INTRODUCTION 
In today’s modern world, we are witnessing, the rise of different business ideas 
every other day.  This has attributed to the immense increase in the competition. 
Some of the shrewd businesses survive through this cut throat competition, 
whereas some of them are wiped out due to the dynamics of this very 
competition. 
Like the strategies to set up businesses, there has been wide increase in realizing 
the need to stay in the business through the different difficult market situations. 
Hence, the business world has also seen the growing importance of business-
saving strategies.  
There can be different strategies to ensure the business continues to exist, or 
existing companies find ways to increase market share by eliminating the 
competitors or to come out of financial crisis by restructuring the present capital 
structure and the like. 
 
Types of Amalgamation
Amalgamation in the nature of 
merger 
Amalgamation in the nature of 
purchase
 CHAPTER OVERVIEW 
© The Institute of Chartered Accountants of India
 
 
    
 
 13.3 
 
AMALGAMATION OF COMPANIES 
 
Such strategies are termed using different words like “corporate marriages”, 
“strategic alliances”, “business partnering”, etc. The same has been defined in the 
Accounting Standard 14 (AS 14). 
In this chapter we shall understand the terms, meanings, methods, accounting 
treatments related to amalgamation in detail. 
2. MEANING OF AMALGAMATION 
Amalgamation refers to the process of merger of two or more companies into a 
single entity or where one company takes over the other by outright purchase. 
Therefore, the term ‘amalgamation’ contemplates two kinds of activities:  
(i) two or more companies join to form a new company (Popularly known as 
Amalgamation) or 
(ii)  absorption and blending of one by the other (Popularly known as 
Absorption).  
As discussed, this arrangement is sought by companies to receive various 
advantages such as economies of large-scale production, avoiding competition, 
increasing efficiency, expansion, increase in market share, etc.  
In amalgamation we have generally two companies called as – 1) vendor or 
Transferor Company and 2) Vendee or Transferee Company. Let us understand 
the concepts through the following examples- 
Example 1- Company A and Company B amalgamate to form Company C. 
Company A and Co B are called transferor companies and Company C is called as 
the transferee company- this strategy is called as AMALGAMATION. 
Example 2- Company A is taken over by Company B (purchased). Here, Company 
A is called as Transferor Company and Company B is Transferee Company. This 
strategy is called as ABSORPTION. 
Example 3- Company A has been suffering from losses for past 5 years, a new 
Company B is floated to take over the existing Company A. Here, Company A is 
the transferor company and Company B is Transferee Company. This strategy is 
termed as EXTERNAL RECONSTRUCTION. 
© The Institute of Chartered Accountants of India
 
 
ADVANCED ACCOUNTING 
 
 
 
 13.4 
The concept of the examples given above can be understood from the following 
table of differences- 
Basis Amalgamation Absorption External 
Reconstruction 
Meaning Two or more 
companies are 
wound up and a 
new company is 
formed to take over 
their business. 
In this case an 
existing company 
takes over the 
business of one or 
more existing 
companies. 
In this case, a newly 
formed company 
takes over the 
business of an 
existing company. 
Minimum 
number of 
Companies 
involved 
At least three 
companies are 
involved.  
At least two 
companies are 
involved. 
Only two companies 
are involved. 
Number of 
new resultant 
companies 
Only one resultant 
company is formed. 
Two companies are 
wound up to form a 
single resultant 
company. 
No new resultant 
company is formed. 
Only one resultant 
company is formed. 
Under this case a 
newly formed 
company takes over 
the business of an 
existing company. 
Objective  Amalgamation is 
done to cut 
competition & reap 
the economies in 
large scale. 
Absorption is done 
to cut competition & 
reap the economies 
in large scale. 
External 
reconstruction is 
done to reorganize 
the financial 
structure of the 
company. 
In every type of amalgamation, the assets and liabilities of the transferor company 
are amalgamated or transferred to the transferee company. The accounting 
treatment in the books of both the transferor and transferee is given in further 
sections. 
© The Institute of Chartered Accountants of India
Page 5


 
 
 
 
LEARNING OUTCOMES 
   
 
CHAPTER 
13 
 
 
AMALGAMATION OF 
COMPANIES  
After studying this chapter, you will be able to: 
? Understand the term “Amalgamation” and the methods of accounting 
for amalgamations. 
? Appreciate the concept of transferee Company and the transferor 
company. 
? Meaning of purchase consideration and Calculation of Purchase 
consideration under various Methods. 
? Pass the entries to close the books of the vendor company. 
? Pass the journal entries in the books of purchasing company to 
incorporate the assets and liabilities of the vendor company and also 
giving effect to other adjustments. 
? Preparation of Balance sheet of transferee company after 
Amalgamation. 
  
© The Institute of Chartered Accountants of India
ADVANCED ACCOUNTING 
 
 
 
 13.2 
This chapter deals with accounting for amalgamations and the treatment of any 
resultant goodwill or reserves. Amalgamation means an amalgamation pursuant 
to the provisions of the Companies Act 2013 or any other statute which may be 
applicable to companies.  
 
1. INTRODUCTION 
In today’s modern world, we are witnessing, the rise of different business ideas 
every other day.  This has attributed to the immense increase in the competition. 
Some of the shrewd businesses survive through this cut throat competition, 
whereas some of them are wiped out due to the dynamics of this very 
competition. 
Like the strategies to set up businesses, there has been wide increase in realizing 
the need to stay in the business through the different difficult market situations. 
Hence, the business world has also seen the growing importance of business-
saving strategies.  
There can be different strategies to ensure the business continues to exist, or 
existing companies find ways to increase market share by eliminating the 
competitors or to come out of financial crisis by restructuring the present capital 
structure and the like. 
 
Types of Amalgamation
Amalgamation in the nature of 
merger 
Amalgamation in the nature of 
purchase
 CHAPTER OVERVIEW 
© The Institute of Chartered Accountants of India
 
 
    
 
 13.3 
 
AMALGAMATION OF COMPANIES 
 
Such strategies are termed using different words like “corporate marriages”, 
“strategic alliances”, “business partnering”, etc. The same has been defined in the 
Accounting Standard 14 (AS 14). 
In this chapter we shall understand the terms, meanings, methods, accounting 
treatments related to amalgamation in detail. 
2. MEANING OF AMALGAMATION 
Amalgamation refers to the process of merger of two or more companies into a 
single entity or where one company takes over the other by outright purchase. 
Therefore, the term ‘amalgamation’ contemplates two kinds of activities:  
(i) two or more companies join to form a new company (Popularly known as 
Amalgamation) or 
(ii)  absorption and blending of one by the other (Popularly known as 
Absorption).  
As discussed, this arrangement is sought by companies to receive various 
advantages such as economies of large-scale production, avoiding competition, 
increasing efficiency, expansion, increase in market share, etc.  
In amalgamation we have generally two companies called as – 1) vendor or 
Transferor Company and 2) Vendee or Transferee Company. Let us understand 
the concepts through the following examples- 
Example 1- Company A and Company B amalgamate to form Company C. 
Company A and Co B are called transferor companies and Company C is called as 
the transferee company- this strategy is called as AMALGAMATION. 
Example 2- Company A is taken over by Company B (purchased). Here, Company 
A is called as Transferor Company and Company B is Transferee Company. This 
strategy is called as ABSORPTION. 
Example 3- Company A has been suffering from losses for past 5 years, a new 
Company B is floated to take over the existing Company A. Here, Company A is 
the transferor company and Company B is Transferee Company. This strategy is 
termed as EXTERNAL RECONSTRUCTION. 
© The Institute of Chartered Accountants of India
 
 
ADVANCED ACCOUNTING 
 
 
 
 13.4 
The concept of the examples given above can be understood from the following 
table of differences- 
Basis Amalgamation Absorption External 
Reconstruction 
Meaning Two or more 
companies are 
wound up and a 
new company is 
formed to take over 
their business. 
In this case an 
existing company 
takes over the 
business of one or 
more existing 
companies. 
In this case, a newly 
formed company 
takes over the 
business of an 
existing company. 
Minimum 
number of 
Companies 
involved 
At least three 
companies are 
involved.  
At least two 
companies are 
involved. 
Only two companies 
are involved. 
Number of 
new resultant 
companies 
Only one resultant 
company is formed. 
Two companies are 
wound up to form a 
single resultant 
company. 
No new resultant 
company is formed. 
Only one resultant 
company is formed. 
Under this case a 
newly formed 
company takes over 
the business of an 
existing company. 
Objective  Amalgamation is 
done to cut 
competition & reap 
the economies in 
large scale. 
Absorption is done 
to cut competition & 
reap the economies 
in large scale. 
External 
reconstruction is 
done to reorganize 
the financial 
structure of the 
company. 
In every type of amalgamation, the assets and liabilities of the transferor company 
are amalgamated or transferred to the transferee company. The accounting 
treatment in the books of both the transferor and transferee is given in further 
sections. 
© The Institute of Chartered Accountants of India
 
 
    
 
 13.5 
 
AMALGAMATION OF COMPANIES 
 
3. TYPES OF AMALGAMATION 
The Institute of Chartered Accountants of India has introduced Accounting 
Standard -14 (AS 14) on ‘Accounting for Amalgamations’. The standard 
recognizes two types of amalgamation –  
Amalgamation in the nature of merger is an amalgamation where there is a 
genuine pooling not only of assets and liabilities of the transferor and transferee 
companies but also of the shareholders’ interests and of the businesses of the 
companies. The accounting treatment of such amalgamations should ensure that 
the resultant figures of assets, liabilities, capital and reserves more or less 
represent the sum of the respective figures of the transferor and transferee 
companies.  
Amalgamation in the nature of merger is an amalgamation, as per para 3(e) of  
AS-14, which satisfies all the following conditions: 
(i) All the assets and liabilities of the transferor company become, after 
amalgamation, the assets and liabilities of the transferee company. 
(ii) 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. 
(iii) 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. 
(iv) The business of the transferor company is intended to be carried on, after 
the amalgamation, by the transferee company. 
(v) 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 
© The Institute of Chartered Accountants of India