Accounts Notes: AMALGAMATION AND RECONSTRUCTION

Amalgamation:

 It may be of two types – Amalgamation in nature of merger and amalgamation in nature of Purchase.
 Amalgamation in nature of merger:
If the amalgamation satisfies all following conditions it may be termed as amalgamation in nature of merger. If any one of conditions is not satisfied it will be in nature of purchase.
 All assets and liabilities of Transferor Company become, after amalgamation, the assets of Transferee Company.
 Shareholders holding not less than 90% of the face value of equity shares of transferor company held therein immediately before amalgamation, shall become shareholders of transferee company by virtue of amalgamation.
 The consideration for amalgamation receivable by those equity shareholders of the transferor company who agree to become equity shareholders of transferee company is discharged by the transferee company wholly by issue of equity shares in transferee company except that cash may be paid in respect of fractional shares.
 The business of Transferor Company is intended to be carried on, after the amalgamation, by the transferee company.
 No adjustment is intended to be made to book values of assets and liabilities of Transferor Company when they are incorporated in financial statements of Transferee Company except to ensure uniformity of accounting policies.

 Methods of Accounting of Amalgamations:

 Pooling of Interests method: (Merger method)
The assets, liabilities and reserves of Transferor Company are recorded by the transferee company at existing carrying amounts after adjusting for uniform accounting principles.

The reserves are preserved in case of this method in the same form as it appeared in financial statements of transferor company. The difference between share capital issued and amount of share capital of transferor company is adjusted in reserves.

 Purchase method:
Transferee company Incorporates assets and liabilities of transferor company on basis of fair values.
The identity of reserves other than statutory reserves like investment allowance reserve, development allowance reserve is not preserved. Difference may be termed as goodwill/capital reserve.
The amount of consideration is deducted from the value of net assets of transferor company if result is negative it is goodwill otherwise capital reserve.
The statutory reserve is recorded by giving a debit to amalgamation adjustment account under misc. expenditure on assets side.

 Treatment of Goodwill on amalgamation:

Goodwill shall be written off over a period of 5 years unless justified for longer period.

 Balance of Profit and Loss account:

In case of merger balance is aggregated with corresponding balance in transferee company.

In case of purchase it loses its identity.

 PURCHASE CONSIDERATION:

The purchase consideration represents the amount payable in the form of securities/cash by the transferee company to shareholders of Transferor Company. The calculation of PC may be based on following methods:

 Lump sum Payment: A consolidated lump sum amount may be agreed.
 Net Assets Method: Under this method intrinsic value of share which may include value of goodwill, shall be ascertained and exchange ratio will be computed.
 Net Payment Method: Under this method different amounts are agreed to be paid to shareholders of Transferor Company. Some of these payments represent purchase consideration.
 Other methods: May include the method based on earnings, market value of share or fair value of share etc.

 Other Notes:
 Cost of amalgamation, discharge of debentures etc. shall not be included in purchase consideration.
 When the transferee company holds some shares in transferor company the purchase consideration is amount payable to outside sundry shareholders.
 When transferor company holds some shares in transferee company the number of shares to be issued by transferee company under the scheme of amalgamation shall be reduced by no of shares held by transferor company.
 When both the companies are holding in both of the shares the above two points shall be effected.
 In case of fraction of shares there will be cash settlement.

JOURNAL ENTERIES IN THE BOOKS OF TRANSFEROR COMPANY:

 BEFORE MERGER:

 For Revaluation of Investments in Equity shares of Transferor co held by Transferee co, if any:

If appreciated:
Investment A/c Dr
To General Reserve a/c.
Otherwise reverse.

 For declaration of dividend by transferee company just before merger:

P/L a/c Dr
To Dividends payable a/c

 ENTERIES FOR AFFECTING AMALGAMATION:

 For Purchase consideration payable:

Business Purchase a/c Dr
To Liquidator of Transferor Co a/c

 For Taking over various assets and Liabilities:

In case of Merger:
Assets a/c Dr (Book Value)
To Liabilities (Book Value)
To Reserves
To Investments (if any)
To Business Purchase

In case of Purchase:
Assets a/c Dr(Agreed Value)
To Liabilities -do-
To Investments (if any)
To Business purchase
(Any difference in above entry shall be Goodwill(Dr)/Capital Reserve(Cr))

 For Discharge of Consideration:

Liquidator of transferor co Dr
To ESC
To PSC
To Debentures (if any)
To Bank
To Securities Premium

 ENTRIES AFTER AMALGAMATION:

 For Adjusting unrealized profits on goods transfer:

P/L / Goodwill or Capital Reserve Dr
To Stock in Trade

 For Adjusting inter co Owings/mutual indebt ness:

Creditors/B/P/Loan Dr
To Debtors/B/R/Loan

 For Cancellation of Dividend:

Proposed Dividend Dr (Proposed dividend cancellation)
To P/L

OR
Dividends Payable Dr (Adjustment of dividends declared)
To Dividends Receivable

 Adjustments for conformity uniform accounting policies shall be done. It may be anything like for eg. Investment may be quoted at MV in one company and at cost in other or change in depreciation rates of two companies. It may not be given in the problem we have to look at balance sheet and then decide.

 For discharge of debentures of Transferor co:

Debentures Dr(Transferor co)
To Debentures (Transferee co)

 The difference if any shall be accounted to reserve in case of amalgamation in the nature of merger, goodwill/capital reserve in nature of purchase.

 For expenses of amalgamation paid by transferee company:

Reserves/GW/CR Dr
To Cash/Bank

 OTHER IMPORTANT NOTES:

 In case the two companies are merged into another third company which becomes holding company then while showing the balance sheet of holding company we have to be careful as all assets and liabilities will not be amalgamated into C Ltd. Show the share capital issued to Transferee Company on liabilities side and show as investments on the assets side.
 When holding company takes over subsidiary company it is merger whereas if subsidiary company takes over holding company it is reverse merger.
 If exchange ratio is not given in the problem then we have to find out by simultaneous equation method.
 Goodwill or capital reserve will arrive only if goodwill is there in valuation of net assets.
 Replacement value is always the highest and realizable value is least.
 In case of Reconstruction, we open capital reduction account and transfer all gains and reduction of loans and creditors, shares claims and then transfer of opposite entry of losses brought forward and balance shall be transferred to capital reserve account if any.