Accounting Treatment for Amalgamation of a Company | UGC NET Commerce Preparation Course PDF Download

Introduction 

When two or more companies are voluntarily liquidated and a new company is established for the purpose of purchasing the business of all the companies is technically termed as Amalgamation

The process in which two or more existing companies engaged in same business decide to liquidate their business and form a new company to take over the business of the existing companies is termed as Amalgamation. The newly formed company acquires the assets and liabilities of existing companies. The newly formed company is known as Amalgamated Company and the liquidating company is also known as amalgamating companies

Purchase Consideration

Newly formed company pays a certain consideration for taking over the business of amalgamating companies, which is known as purchase consideration. These purchase consideration can be paid in the form of equity shares, preference shares and debentures of the new company. Cash may also be paid if required. There are three methods to calculate purchase consideration
(a) Net Asset Method
(b) Consideration (Payment) Method
(c) Lump Sum Method

To decide Purchase Consideration following steps to be considered:
(i) Calculate the total amounts of assets which are took over at certain specific-agreed value by the new company for all the amalgamating company (old company).
(ii) Calculate total amounts of liabilities which are accepted to take over at the agreed value by the new company for all the amalgamating company (old company).
(iii) Calculate Net Asset = Total Assets realised – Total Liabilities taken over for all the amalgamating company (old company)
(iv) Calculate Purchase Consideration paid by the amalgamated (new) Company to amalgamating company (old Company)
(v) Calculate Goodwill OR Capital Reserve for all the amalgamating company (old company)

Goodwill = Purchase Consideration – Net Assets
OR
Capital Reserve = Net Assets – Purchase Consideration

Necessary Accounts in the Books of Amalgamating Company (old Company)

(a) Realisation A/c.
 (b) Equity shareholders‟ A/c.
 (c) Preference shareholders‟ A/c.
 (d) Debenture holders‟ A/c.
 (e) Cash/Bank A/c.
 (f) New company‟s A/c.
 (g) New company‟s Equity shares‟ A/c.
 (h) New company‟s Preference shares‟ A/c.
 (i) New company‟s Debentures A/c

Notes for Debentures:

If New Co. offers its shares, debentures , cash or its own debentures in exchange of the debenture of old company in that case the Liability of the old debentures is not accepted by the new company. Therefore, while ascertaining net assets, debentures are not included in liability. While computing purchase consideration the amount of new debentures which is received in exchange of old debentures are to be included in purchase consideration.

Following Steps to be followed while recording Journal in the Books of Old Company Or preparing Necessary A/c. in the Books of Old Company

• Transfer All the tangible and intangible Assets except cash and bank balance on debit side of Realisation A/c.
• Transfer All the Outside Liabilities (including Debentures if nothing is mentioned) on credit side of Realisation A/c.
• Transfer Equity share Capital and Balance of Reserve and Surplus to Credit side of Equity shareholders‟ A/c.
• Transfer Preference share Capital to Preference Shareholders‟ A/c.
• Transfer fictitious Assets like Discount on share or debenture, Underwriting Commission, Establishment Expenses, Preliminary Expenses, Advertisement Suspense Account, Suspense Account and Profit & Loss A/c. debit Balance to Equity shareholders‟ A/c.
• Record the purchase consideration on credit side of realisation A/c. and debiting the same to New Company‟s A/c.
• Dispose off the assets not taken over by the new company and discharge the liabilities which is not taken over by the new company
• Record the Dissolution (Liquidation) Expenses paid by the old company
• Record the purchase consideration received from new company
• Distribute the Purchase consideration among equity shareholder; Preference shareholder
• Close the Accounts (except Realisation; Equity shareholder; Cash/Bank A/c.)
• Close realisation A/c. and profit or loss is transferred to Equity shareholders‟ A/c.
• Close Equity shareholders‟ A/c. and balance is transferred to Cash/Bank A/c.
• Bank Account is generally Tally by closing it

Accounting Journal in the Books of Amalgamating company (old company)

(i) When Assets are transferred to Realisat ion A/c.

(ii) When Liabilities are transferred to Realisation A/c.

(iii) When Equity Share Capital and Balance of Reserve & Surplus (except specific Provisional Reserve is transferred to Equity shareholders‟ A/c.

(iv) When Preference Share Capital is transferred to Preference Shareholders‟ A/c.

(v) When Purchase consideration is due

(vi) When Purchase Consideration is discharged by New Co.

(vii) When Assets disposed off not taken by new company

(viii) When Liabilities discharged which is not taken by new company

(ix) When dissolution expenses paid by the company

(x) New Company‟s Equity share is distributed among Equity shareholder/Preference Shareholder / Debenture holder (as the case may be)

(xi) New Company‟s Preference Share is distributed among Equity shareholder/Preference Shareholder / Debenture holder (as the case may be)

(xii) New Company‟s Debenture is distributed generally among Debenture holder

(xiii) Closing the Preference shareholder A/c. and Debentureholder A/c. (if separately prepared) Balance is transferred to Realisation A/c.

OR

(xiv) Closing Realisation A/c.

(xv) Closing Equity Shareholder A/c.

Accounting Journal in the Books of Amalgamated company (New company)

(a) When Business Purchase of Old Company

(b) When Business Purchase is discharged

(c) If Dissolution Expenses is paid and bone by New company

(d) When establishment expenses paid by the New Company

(e) When New company issues shares or debentures to general public

1. Method to calculate Purchase Consideration:

Note: If information about all the three method is given in the question then we should   follow Net payment method.

2. Amalgamation in nature of merger:

Amalgamation deemed to be in the nature of merger if following conditions are satisfied: -

(BARED)

• Business of vendor company must be carried on by the purchasing company.
• All assets and liabilities of vendor company transferred to purchasing company.
• Recorded in new company of assets and liabilities taken over at Book Value of vendor company. (Except to comply with accounting policy)
• Equity shareholders holding 90% shares (except already held) agree to become shareholders in new company.
• Disbursement of Purchase Consideration only in shares except cash for fraction of shares.

3. Entries in books of vendor company:
a) Realisation account: We have to follow the following procedure

• Transfer all real assets to debit side at Gross Book Value including goodwill but excluding fictitious assets.
• Transfer all outside liabilities to credit side at Gross Book Value but excluding accumulated reserves and surplus.
• If any asset/liabilities not taken over than any realisation on sale of such asset or payment on disbursement of such liabilities is credited/debited to realisation account.
• Amount of Purchase Consideration is credited to realisation account.
• Liquidation expenses debited to realisation account if born by vendor company
• Realisation account is balanced and the balance of this account is profit or loss on realisation, which is transferred to Equity Shareholders Account.

Notes:

• Assets not taken over if transferred to shareholders account: it must be shown on debit side of shareholders account at Current Value of such asset and a corresponding credit is made to realisation account.
• What are outside liabilities: Preference shareholders and Debenture holders are treated outside liabilities. But proposed dividend is not treated outside liabilities.
• If against any reserve there is any expected liabilities: then to the extent of that expected liability the amount of reserve is transferred to realisation account and balance to shareholders account as usual.

Example:
Workmen compensation reserve given in Balance sheet = 8000
Expected liability to workmen =5000.
Therefore Rs 5000 will be transferred to the credit side of realisation account and balance Rs 3000 to the credit side of shareholders account.

Any inter company owings or adjustments: is ignored while preparing vendor company books, it is considered only while preparing purchasing company books.
b) Equity Shareholders Account:

• Credit side: Equity Share Capital, Accumulated profits and reserves, balance of realisation account.
• Debit side: Accumulated losses, Fictitious asset, amount of Purchase Consideration, balance of realisation account. 

c) Purchasing Company Account:

• Credit side: Amount of Purchase Consideration due.
• Debit side: Discharge of Purchase Consideration.

4. Entries in books of Purchasing Company:
a) Three basic entries

b) For liquidation expenses paid by purchasing company 

c) For cancellation of mutual owings 

d) For adjustment of unrealised profit 

e) For carry forward of statutory reserves 

f) If both capital reserve and goodwill appears in books 

Amalgamation in nature of merger

 The entries in the case of amalgamation in the nature of merger is almost similar to the entries given above, the only difference is:

• In the second basic entry above, instead of opening the Goodwill/Capital reserve a/c, the difference between purchase consideration paid and book value of the share capital of vendor company is adjusted in general reserve. If general reserve is not sufficient then balance adjusted in profit & loss account. Similarly any difference in actual debenture value and the amount paid to them is also adjusted to general reserve. If general reserve is not sufficient then balance adjusted in profit & loss account.
• Where ever Goodwill/Capital reserve a/c is debited or credited in above entries we will have to debit or credit general reserve account.

Following will remain same in both the methods of amalgamation

• Calculation of Purchase consideration.
• Discharge of Purchase consideration.
• Entries in books of vendor company.

What is the Meaning of Reconstruction?

• The process of reconstructing a company involves reorganizing its legal, operational, and ownership structures. 
• This entails revaluing assets and reassessing liabilities in order to create a new set of obligations. 
• Furthermore, transferring a business also includes winding up the old business and having its shareholders agree to accept shares in the new firm that are equal in value to their current shares. 
• This type of restructuring is often necessary when a company has been suffering losses over an extended period of time, or when its financial statements do not accurately reflect the true condition of the company and misrepresent the actual net worth. 

Different types of Reconstruction of Compan

Two approaches are used to restructure a corporation.

External Reconstruction of a Company: 

• When a firm has been suffering financial losses for an extended period of time, resulting in a financial crisis, one option is to transfer its assets and liabilities to a newly created company. This process is known as external reconstruction.
• External reconstruction involves the selling of an existing firm’s business to a newly created company. 
• In this process, the existing firm is dissolved and a new company is formed in its place. 
• The dissolved firm is known as the vendor company and the newly created one is called the purchasing company. 
• Those who own shares in the vendor firm would also own shares in the purchasing corporation. 

Internal Reconstruction of a Company: 

• A company's internal reconstruction is a reorganization of its financial structure which enables it to go on operating as normal. 
• This process often involves reducing the company's share capital to erase any previous losses it has incurred. 

Difference between Internal and External Reconstruction of a Company