Amalgamation of Companies
There are many forms of business combinations to obtain the economies of large scale production or to avoid the cut throat competition. They are amalgamation, absorption, external reconstruction etc.
The term amalgamation is used when two or more existing companies go intoliquidation and a new company is formed to take over the business of liquidated companies. The term absorption is used when an existing company takes over the business of one or more existing companies which go into liquidation. In external reconstruction, one existing company goes into liquidation and a new company isformed to take overthe former company.
Definitions as per Accounting Standard 14 (AS‐14)
a. Amalgamation –means an amalgamation pursuantto the provisions ofthe Companies Act 1956 or any otherstatute whichmay be applicable to companies.
b. Transferor Company –meansthe companywhich is amalgamated into another company.
c. Transferee Company –meansthe company to which a 6ransferor company is amalgamated.
d. Reserve – means the portion of earnings, receipts or other surpluses of an enterprise (whether capital orrevenue) appropriated by the managementfor a general or a specific purpose otherthan provision for depreciation or diminution in the value of assets orfor a known liability.
Types of Amalgamation
Amalgamation in the nature of Merger (Pooling Interest Method)
An amalgamation should be considered to be an amalgamation in the nature of merge when all the following conditions are satisfied:
i. All the assets and liabilities of the Transferor Company or companies before amalgamation should become the assets and liabilities ofthe transferee company.
ii. Shareholders holding not less than 90% of the face value of the equity shares of the transferor company (excluding the proportion held by the transferee company) should become the shareholdersofthe transfereecompany.
iii. The consideration payable to the above mentioned shareholders should be discharged by the transferee company by the issue of the equity shares and cash can be payable in respect of fractional shares.
iv. The business of the Transferor Company/ companies is intended to be carried on 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/ companies when they are incorporated in the financial statements of the transferee company exceptto ensure uniformity of accounting policies.
Amalgamation in the nature of purchase
An amalgamation should be considered to be an amalgamation in the nature of purchase, when any one or more ofthe conditionsspecified for amalgamation in the nature of mergeris not satisfied.
Difference betweenAmalgamation in the nature of merger andAmalgamation in the nature of purchase
|1. There is a genuine mpooli9ng of assets and liabilities ofthe transferor companies as well as the share holders’ interest. As such the shareholders of all the transferor companies conti9nue to have substantial or proportionate share in the equity or management of Transferee Company.||1. One company acquires another. As a consequencx3,the shareholders ofthe transferor company normally do not continue to have a proportionate share in the equity management of the transferee company|
|2. Assets, liabilities and reserves ofthe transferor company are recorded by the transferee company at their bookvalues.||2. Assets, liabilities and reserves of the transferor company are recorded by the transferee company either at book value or at valuesrevised on the basis oftheirfair values|
|3. The balance of P&L A/c of the transferorcompanyaggregatedwith the balance of the P&L A/c of the transferee company.||3. The balance of P&L A/c of the transferor company is not included in the books ofthe transferee company.|
|4. All reserves whether capital or revenue 0of Transferor Company are merged into the reserves of Transferee Company.||4. Only statutory reserves of Transferor Company are taken in the books of Transferee Company in order to preservetheiridentity.|
|5. Itis alwaysintended to continue the businessoftransferor company.||5. It may not be intended to continue the businessofTransferorCompany.|
|6. Allthe assets of Transferor Company become the assets of the transferee company||6. Allthe assets of Transferor Company may or may not become the assets of thetransfereecompany.|
|7. Purchase consideration is usually valued at the par value of the shares issued.||7. Purchase consideration is usually valued at the market price of the shares issued.|