Amalgamation of Companies – Basic Concepts | Advanced Corporate Accounting - B Com PDF Download

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 INTRODUCTION 
 
For the purpose of enjoying the economies of scale and to reduce the cut throat competition, two 
or more than two joint stock companies may combine their undertakings and become one joint 
stock company. It can be done either by one of the existing joint stock companies taking over the 
other combining company or companies, the latter being dissolved or by standing a new joint 
stock company, which takes over all the combining joint stock companies. It is being done either 
by Amalgamation or Absorption.  
 
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 INTRODUCTION 
 
For the purpose of enjoying the economies of scale and to reduce the cut throat competition, two 
or more than two joint stock companies may combine their undertakings and become one joint 
stock company. It can be done either by one of the existing joint stock companies taking over the 
other combining company or companies, the latter being dissolved or by standing a new joint 
stock company, which takes over all the combining joint stock companies. It is being done either 
by Amalgamation or Absorption.  
 
 
 
The meaning of these terms is as follows: 
Amalgamation: When two or more companies same in all respects go into liquidation and the 
new company is formed to take over their business is called amalgamation. For example, if a 
new company C Ltd. is formed to take over A Ltd. and B Ltd. which are existing companies, it is 
an example of amalgamation. 
Absorption: Under absorption, no new company is formed, whereas an existing company 
purchases another existing company, it is called absorption. 
 
 OBJECTIVES OF AMALGAMATION 
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).There are many objectives of 
amalgamation. Some of the objectives are as follow: Let us discuss them in detail. 
(i)  To have a better control over the market and also to increase the market share and area • 
of operations. 
(ii)  To eliminate the cut-throat competition and rivalry among competing the amalgamating 
companies.  
(iii)  To enjoy the economies of large scale production.  
(iv)  To utilize the services of professional experts.  
(v)  To increase the availability of funds for the future investment plans.  
(vi)  To achieve all other advantages of combination.  
 
 RECONSTRUCTION 
 
Reconstruction is entirely of different nature. The objective is not to bring about a combination 
of companies but merely to reorganize a company which has suffered huge losses which are to 
be written off. Reconstruction may be of two types: 
 
 External Reconstruction 
It is not exactly similar to amalgamation. In external reconstruction, existing company is wound 
up by selling its business to newly formed company which is generally similar named or owned 
by the same shareholders. 
 
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 INTRODUCTION 
 
For the purpose of enjoying the economies of scale and to reduce the cut throat competition, two 
or more than two joint stock companies may combine their undertakings and become one joint 
stock company. It can be done either by one of the existing joint stock companies taking over the 
other combining company or companies, the latter being dissolved or by standing a new joint 
stock company, which takes over all the combining joint stock companies. It is being done either 
by Amalgamation or Absorption.  
 
 
 
The meaning of these terms is as follows: 
Amalgamation: When two or more companies same in all respects go into liquidation and the 
new company is formed to take over their business is called amalgamation. For example, if a 
new company C Ltd. is formed to take over A Ltd. and B Ltd. which are existing companies, it is 
an example of amalgamation. 
Absorption: Under absorption, no new company is formed, whereas an existing company 
purchases another existing company, it is called absorption. 
 
 OBJECTIVES OF AMALGAMATION 
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).There are many objectives of 
amalgamation. Some of the objectives are as follow: Let us discuss them in detail. 
(i)  To have a better control over the market and also to increase the market share and area • 
of operations. 
(ii)  To eliminate the cut-throat competition and rivalry among competing the amalgamating 
companies.  
(iii)  To enjoy the economies of large scale production.  
(iv)  To utilize the services of professional experts.  
(v)  To increase the availability of funds for the future investment plans.  
(vi)  To achieve all other advantages of combination.  
 
 RECONSTRUCTION 
 
Reconstruction is entirely of different nature. The objective is not to bring about a combination 
of companies but merely to reorganize a company which has suffered huge losses which are to 
be written off. Reconstruction may be of two types: 
 
 External Reconstruction 
It is not exactly similar to amalgamation. In external reconstruction, existing company is wound 
up by selling its business to newly formed company which is generally similar named or owned 
by the same shareholders. 
 
 
 
 Internal Reconstruction 
It is altogether a different form of business combination. In internal reconstruction, the company 
continues with its legal entity and is only internally reorganized. In this, rearrangement and 
reduction of share capital is done. Under internal reconstruction, the share capital is reduced to 
its real worth and the same amount is used to eliminate the accumulated losses, fictitious assets 
and to write down the overvalued assets of the company. 
 
 DIFFERENCE BETWEEN AMALGAMATON, ABSORPTION AND 
RECONSTRUCTION 
 
Basis Amalgamation Absorption Reconstruction 
Formation A new company is 
formed. 
No new company is 
formed. 
Company is 
reconstructed. 
Liquidation All the companies 
which go for 
amalgamation are 
liquidated. 
The company whose 
business is purchased 
by another company 
goes into liquidation. 
The company which 
is reconstructed goes 
into liquidation. 
Financial Position of 
the Company 
Financial position of 
all the involved 
companies is same. 
Financial position of 
the absorbing 
company is 
comparatively sound 
than the absorbed 
company. 
Financial position of 
the old company is 
bad and is usually 
considered as the sick 
unit. 
Objective To eliminate the 
competition among 
the amalgamated 
companies. 
To expand the 
business and to 
achieve the economies 
of large scale 
production. 
To write off the 
accumulated losses 
and offering the real 
worth of the business 
to the shareholders. 
Position of 
shareholders in new 
company 
 
Shareholders of the 
amalgamated 
companies become 
the shareholders of 
the new company. 
Shareholders of the 
selling company may 
become the 
shareholders of the 
purchasing company 
Most of the 
shareholders of the 
old company continue 
to be the shareholders 
of the new company 
with the proportionate 
share. 
    
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 INTRODUCTION 
 
For the purpose of enjoying the economies of scale and to reduce the cut throat competition, two 
or more than two joint stock companies may combine their undertakings and become one joint 
stock company. It can be done either by one of the existing joint stock companies taking over the 
other combining company or companies, the latter being dissolved or by standing a new joint 
stock company, which takes over all the combining joint stock companies. It is being done either 
by Amalgamation or Absorption.  
 
 
 
The meaning of these terms is as follows: 
Amalgamation: When two or more companies same in all respects go into liquidation and the 
new company is formed to take over their business is called amalgamation. For example, if a 
new company C Ltd. is formed to take over A Ltd. and B Ltd. which are existing companies, it is 
an example of amalgamation. 
Absorption: Under absorption, no new company is formed, whereas an existing company 
purchases another existing company, it is called absorption. 
 
 OBJECTIVES OF AMALGAMATION 
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).There are many objectives of 
amalgamation. Some of the objectives are as follow: Let us discuss them in detail. 
(i)  To have a better control over the market and also to increase the market share and area • 
of operations. 
(ii)  To eliminate the cut-throat competition and rivalry among competing the amalgamating 
companies.  
(iii)  To enjoy the economies of large scale production.  
(iv)  To utilize the services of professional experts.  
(v)  To increase the availability of funds for the future investment plans.  
(vi)  To achieve all other advantages of combination.  
 
 RECONSTRUCTION 
 
Reconstruction is entirely of different nature. The objective is not to bring about a combination 
of companies but merely to reorganize a company which has suffered huge losses which are to 
be written off. Reconstruction may be of two types: 
 
 External Reconstruction 
It is not exactly similar to amalgamation. In external reconstruction, existing company is wound 
up by selling its business to newly formed company which is generally similar named or owned 
by the same shareholders. 
 
 
 
 Internal Reconstruction 
It is altogether a different form of business combination. In internal reconstruction, the company 
continues with its legal entity and is only internally reorganized. In this, rearrangement and 
reduction of share capital is done. Under internal reconstruction, the share capital is reduced to 
its real worth and the same amount is used to eliminate the accumulated losses, fictitious assets 
and to write down the overvalued assets of the company. 
 
 DIFFERENCE BETWEEN AMALGAMATON, ABSORPTION AND 
RECONSTRUCTION 
 
Basis Amalgamation Absorption Reconstruction 
Formation A new company is 
formed. 
No new company is 
formed. 
Company is 
reconstructed. 
Liquidation All the companies 
which go for 
amalgamation are 
liquidated. 
The company whose 
business is purchased 
by another company 
goes into liquidation. 
The company which 
is reconstructed goes 
into liquidation. 
Financial Position of 
the Company 
Financial position of 
all the involved 
companies is same. 
Financial position of 
the absorbing 
company is 
comparatively sound 
than the absorbed 
company. 
Financial position of 
the old company is 
bad and is usually 
considered as the sick 
unit. 
Objective To eliminate the 
competition among 
the amalgamated 
companies. 
To expand the 
business and to 
achieve the economies 
of large scale 
production. 
To write off the 
accumulated losses 
and offering the real 
worth of the business 
to the shareholders. 
Position of 
shareholders in new 
company 
 
Shareholders of the 
amalgamated 
companies become 
the shareholders of 
the new company. 
Shareholders of the 
selling company may 
become the 
shareholders of the 
purchasing company 
Most of the 
shareholders of the 
old company continue 
to be the shareholders 
of the new company 
with the proportionate 
share. 
    
 
 
 IMPORTANT TERMS IN AMALGAMATION 
Some Important Terms in Amalgamation are as under 
(1)  Transferor Company: This means the company which is amalgamated into another 
company. 
(2)  Transferee Company: It is a company in which transferor company amalgamate.  
(3)  Amalgamation: Amalgamation is basically of two types: 
(i)  Amalgamation in the nature of merger: Amalgamation in the nature of merger is an 
amalgamation which satisfies all the following conditions: . 
a) All the assets and liabilities of the transferor company become, after 
amalgamation, the assets and liabilities of the transferee company.  
b) 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.  
c) 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, with the exception that cash may be 
paid only in respect of fractional shares. 
d) The business of the transferor company is intended to be carried on, after the 
amalgamation, by the transferee company.  
e) No adjustment is intended to be made to the book value 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 the 
accounting policies.  
(ii)  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 five conditions stated 
above. 
(4) Assets purchased and Business purchased: If it is mentioned in the question that the 
transferee company has purchased the assets of the Transferor company, it means that 
Transferee Company has acquired all the assets including cash and not the liabilities of 
the business of the transferor company. If it is mentioned that the Transferee company 
has purchased the business of the transferor company, it means that Transferee Company 
has acquired all the assets and liabilities of the transferor company. 
(5) Liabilities and Trade liabilities: The term liabilities includes trade creditors, Bills 
payable, debentures, bank overdraft, outstanding expenses, pension fund, provident fund, 
Page 5


 
 
   
 
 
 
  
  
  
  
   
   
  
  
  
  
  
  
  
  
  
  
 
  
 
 
  
  
  
  
  
  
 
 INTRODUCTION 
 
For the purpose of enjoying the economies of scale and to reduce the cut throat competition, two 
or more than two joint stock companies may combine their undertakings and become one joint 
stock company. It can be done either by one of the existing joint stock companies taking over the 
other combining company or companies, the latter being dissolved or by standing a new joint 
stock company, which takes over all the combining joint stock companies. It is being done either 
by Amalgamation or Absorption.  
 
 
 
The meaning of these terms is as follows: 
Amalgamation: When two or more companies same in all respects go into liquidation and the 
new company is formed to take over their business is called amalgamation. For example, if a 
new company C Ltd. is formed to take over A Ltd. and B Ltd. which are existing companies, it is 
an example of amalgamation. 
Absorption: Under absorption, no new company is formed, whereas an existing company 
purchases another existing company, it is called absorption. 
 
 OBJECTIVES OF AMALGAMATION 
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).There are many objectives of 
amalgamation. Some of the objectives are as follow: Let us discuss them in detail. 
(i)  To have a better control over the market and also to increase the market share and area • 
of operations. 
(ii)  To eliminate the cut-throat competition and rivalry among competing the amalgamating 
companies.  
(iii)  To enjoy the economies of large scale production.  
(iv)  To utilize the services of professional experts.  
(v)  To increase the availability of funds for the future investment plans.  
(vi)  To achieve all other advantages of combination.  
 
 RECONSTRUCTION 
 
Reconstruction is entirely of different nature. The objective is not to bring about a combination 
of companies but merely to reorganize a company which has suffered huge losses which are to 
be written off. Reconstruction may be of two types: 
 
 External Reconstruction 
It is not exactly similar to amalgamation. In external reconstruction, existing company is wound 
up by selling its business to newly formed company which is generally similar named or owned 
by the same shareholders. 
 
 
 
 Internal Reconstruction 
It is altogether a different form of business combination. In internal reconstruction, the company 
continues with its legal entity and is only internally reorganized. In this, rearrangement and 
reduction of share capital is done. Under internal reconstruction, the share capital is reduced to 
its real worth and the same amount is used to eliminate the accumulated losses, fictitious assets 
and to write down the overvalued assets of the company. 
 
 DIFFERENCE BETWEEN AMALGAMATON, ABSORPTION AND 
RECONSTRUCTION 
 
Basis Amalgamation Absorption Reconstruction 
Formation A new company is 
formed. 
No new company is 
formed. 
Company is 
reconstructed. 
Liquidation All the companies 
which go for 
amalgamation are 
liquidated. 
The company whose 
business is purchased 
by another company 
goes into liquidation. 
The company which 
is reconstructed goes 
into liquidation. 
Financial Position of 
the Company 
Financial position of 
all the involved 
companies is same. 
Financial position of 
the absorbing 
company is 
comparatively sound 
than the absorbed 
company. 
Financial position of 
the old company is 
bad and is usually 
considered as the sick 
unit. 
Objective To eliminate the 
competition among 
the amalgamated 
companies. 
To expand the 
business and to 
achieve the economies 
of large scale 
production. 
To write off the 
accumulated losses 
and offering the real 
worth of the business 
to the shareholders. 
Position of 
shareholders in new 
company 
 
Shareholders of the 
amalgamated 
companies become 
the shareholders of 
the new company. 
Shareholders of the 
selling company may 
become the 
shareholders of the 
purchasing company 
Most of the 
shareholders of the 
old company continue 
to be the shareholders 
of the new company 
with the proportionate 
share. 
    
 
 
 IMPORTANT TERMS IN AMALGAMATION 
Some Important Terms in Amalgamation are as under 
(1)  Transferor Company: This means the company which is amalgamated into another 
company. 
(2)  Transferee Company: It is a company in which transferor company amalgamate.  
(3)  Amalgamation: Amalgamation is basically of two types: 
(i)  Amalgamation in the nature of merger: Amalgamation in the nature of merger is an 
amalgamation which satisfies all the following conditions: . 
a) All the assets and liabilities of the transferor company become, after 
amalgamation, the assets and liabilities of the transferee company.  
b) 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.  
c) 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, with the exception that cash may be 
paid only in respect of fractional shares. 
d) The business of the transferor company is intended to be carried on, after the 
amalgamation, by the transferee company.  
e) No adjustment is intended to be made to the book value 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 the 
accounting policies.  
(ii)  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 five conditions stated 
above. 
(4) Assets purchased and Business purchased: If it is mentioned in the question that the 
transferee company has purchased the assets of the Transferor company, it means that 
Transferee Company has acquired all the assets including cash and not the liabilities of 
the business of the transferor company. If it is mentioned that the Transferee company 
has purchased the business of the transferor company, it means that Transferee Company 
has acquired all the assets and liabilities of the transferor company. 
(5) Liabilities and Trade liabilities: The term liabilities includes trade creditors, Bills 
payable, debentures, bank overdraft, outstanding expenses, pension fund, provident fund, 
 
 
workmen profit sharing fund etc. The term trade liabilities include creditors and bills 
payable which are associated with sale/purchase of goods and services. 
 
 METHODS OF ACCOUNTING FOR AMALGAMATION  
 
There are two main methods of accounting for amalgamation: (a) The pooling of interest 
method; and (b) 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 object 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. 
The Pooling of Interests Method 
Under the pooling of interests 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). 
If, at the time of the amalgamation, the transferor and the transferee companies have conflicting 
accounting policies, a uniform set of accounting policies is adopted following the amalgamation. 
The effects on the financial statements of any changes in accounting policies are reported in 
accordance with Accounting Standard (AS) 5, Net Profit or Loss for the Period, Prior Period 
Items and Changes in Accounting Policies. 
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. 
Where assets and liabilities are restated on the basis of their fair values, the determination of fair 
values may be influenced by the intentions of the transferee company. For example, the 
transferee company may have a specialized use for an asset, which is not available to other 
potential buyers. The transferee company may intend to effect changes in the activities of the 
transferor company which necessitate the creation of specific provisions for the expected costs, 
e.g. planned employee termination and plant relocation costs.