Amalgamation of Companies: Notes | Advanced Accounting for CA Intermediate

 Page 1


U
LEARNING OUTCOMES 
  
 
 
 
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. 
? Calculate purchase consideration under both the methods of 
amalgamation as per AS 14. 
? 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.  
CHAPTER 
5 
Page 2


U
LEARNING OUTCOMES 
  
 
 
 
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. 
? Calculate purchase consideration under both the methods of 
amalgamation as per AS 14. 
? 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.  
CHAPTER 
5 
 
5.2 
 
ADVANCED ACCOUNTING 
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. The accounting for amalgamation depends on whether 
amalgamation is in the nature of merger or in the nature of purchase. 
 
 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. 
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, method, accounting 
treatments related to amalgamation in detail. 
Types of Amalgamation
Amalgamation in the nature of 
merger 
Amalgamation in the nature of 
purchase
 
Page 3


U
LEARNING OUTCOMES 
  
 
 
 
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. 
? Calculate purchase consideration under both the methods of 
amalgamation as per AS 14. 
? 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.  
CHAPTER 
5 
 
5.2 
 
ADVANCED ACCOUNTING 
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. The accounting for amalgamation depends on whether 
amalgamation is in the nature of merger or in the nature of purchase. 
 
 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. 
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, method, accounting 
treatments related to amalgamation in detail. 
Types of Amalgamation
Amalgamation in the nature of 
merger 
Amalgamation in the nature of 
purchase
 
 
5.3 
 
AMALGAMATION OF COMPANIES 
 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 or 
(ii)  absorption and blending of one by the other.  
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 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. 
Page 4


U
LEARNING OUTCOMES 
  
 
 
 
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. 
? Calculate purchase consideration under both the methods of 
amalgamation as per AS 14. 
? 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.  
CHAPTER 
5 
 
5.2 
 
ADVANCED ACCOUNTING 
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. The accounting for amalgamation depends on whether 
amalgamation is in the nature of merger or in the nature of purchase. 
 
 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. 
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, method, accounting 
treatments related to amalgamation in detail. 
Types of Amalgamation
Amalgamation in the nature of 
merger 
Amalgamation in the nature of 
purchase
 
 
5.3 
 
AMALGAMATION OF COMPANIES 
 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 or 
(ii)  absorption and blending of one by the other.  
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 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. 
 
5.4 
 
ADVANCED ACCOUNTING 
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. 
 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.  
 
Page 5


U
LEARNING OUTCOMES 
  
 
 
 
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. 
? Calculate purchase consideration under both the methods of 
amalgamation as per AS 14. 
? 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.  
CHAPTER 
5 
 
5.2 
 
ADVANCED ACCOUNTING 
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. The accounting for amalgamation depends on whether 
amalgamation is in the nature of merger or in the nature of purchase. 
 
 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. 
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, method, accounting 
treatments related to amalgamation in detail. 
Types of Amalgamation
Amalgamation in the nature of 
merger 
Amalgamation in the nature of 
purchase
 
 
5.3 
 
AMALGAMATION OF COMPANIES 
 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 or 
(ii)  absorption and blending of one by the other.  
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 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. 
 
5.4 
 
ADVANCED ACCOUNTING 
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. 
 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.  
 
 
 
5.5 
 
AMALGAMATION OF 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 
of accounting policies. For example, if transferor company is following 
weighted average method for inventory valuation, the book value of the 
inventory of the transferor company will be revised by applying the FIFO 
method (if the transferee company follows FIFO method for inventory 
valuation). 
If any one or more of the above conditions are not satisfied in an amalgamation, 
such amalgamation is called amalgamation in the nature of purchase. 
Difference between amalgamation in the nature of merger and amalgamation 
in the nature of purchase 
Best of Distinction Amalgamation in the 
Nature of Merger 
Amalgamation in the 
Nature of Purchase 
(a) Transfer of Assets 
and Liabilities 
There is transfer of all 
assets & liabilities. 
There need not be transfer 
for all assets & liabilities.