Amalgamation

AMALGAMATION

Amalgamation is an event or transaction in which two or more

companies brought under common control to dictate operating and

financial policies.Amalgamation includes absorption

and external reconstruction.

Motives for Amalgamation

Economies of ScaleFinancial EconomiesGrowthDiversificationManagerial Effectivenes

Common ways in which companies can amalgamate together to gain advantage in their market. They are as under:

• Horizontal • Conglomerate• Vertical Types of amalgamataion• Amlgamation in the nature of merger• Amlgamation in the nature of purchage

• Absorption:It is the process in which one existing company takes over the other existing company and merge together as a single unit. Amalgamation:It is the process in which two or more existing companies joins together and start new company with new name and identity and dissolves the existing companies. External Reconstruction:It is the process in which one existing company reconstruct itself with new name and identity.

• 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.

Merger & Consolidation

• A Merger is when two or more corporations come together but only one of the corporation stays exists afterwards. For example if company A and Company B merge to and only company A or B exists afterwards.

• In consolidation, when two or more corporations come together to form a completely new corproation. For example company A and Company B consolidate to form company C.

Amalgamation in the Nature of Purchase

• An amalgamation will be treated as 'Amalgamation in the Nature of Purchase' if only one or more of the five conditions specified above (for amalgamation in the natureof merger) is not satisfied. These are amalgamations which are in effect a mode by whichone company acquires another company and, as a consequence, the shareholders of thecompany which is acquired normally do not continue to have a proportionate share in theequity of the combined company, or the business of the company which is acquired is notintended to be continued

Entries in books of Purchasing Company

Three basic entriesFor purchase consideration dueBusiness purchase a/c Dr. To liquidator of vendor companyFor assets and liabilities taken overAssets taken over Dr.Goodwill a/c Dr. To liabilities taken over To business purchase a/c To capital reserve a/cFor discharge of purchase considerationLiquidator of vendor company a/c Dr. To equity share capital a/c To share premium a/c To debentures a/c To preference share capital a/c To cash

For liquidation expenses paid by purchasing company

Goodwill/Capital reserve a/c Dr. To cash a/c

For cancellation of mutual owings

Creditor /Bills payable a/c Dr. To Debtors/Bills receivable a/c

For adjustment of unrealised profit

Goodwill/Capital reserve a/c Dr. To Stock a/c

For carry forward of statutory reserves

Amalgamation adjustment a/c Dr. To Statutory reserve a/c

If both capital reserve and goodwill appears in books

Capital reserve a/c Dr. To Goodwill a/c

Procedure followed in an amalgamation

• 1. The BODs work out the terms of the amalgamation.

• 2.submit the scheme to high court for approval• 3.share holders approve the terms• 4.approal of SEBI,MOA &Companies act• 5. New company is formed to issue its ownn shares.• 6.Transferor company is liquidated and all assets &

liabilities are taken over by the transferee company.

Method to calculate Purchase Consideration

• Net Asset method• Agreed value of • assets taken over xxx• Less: Agreed value of • Liab. taken over xxx• PC xxx

Intansic value method

• MV of total assets xxx• Less: MV of total Liab. xxx• Net intrinsic value xxx

• Intrinsic Value = Net Intrinsic value • Per share No. of equity share PC= No. of equity shares purchased X Intrinsic

value per share of vendor company

Net payment method

• Amalgamation in nature of: -• Merger: Amount paid to Equity shareholders

only in the form of equity shares in purchasing company except cash for fraction of shares.

• Purchase: Cash and agreed value of shares, debentures and other assets given by purchasing company to the liquidator of vendor company For the Shareholders of vendor company.

Entries in books of vendor company Realisation account: We have to follow the following

procedure–Transfer all real assets to debit side at Gross

Book Value including goodwill and cash but excluding fictitious assets.

• Fictitious assets: preliminary expenses, discount on issue of shares and debentures , debit balance of profit and loss account.

Realisation account:

–Transfer all outside liabilities to credit side at Gross Book Value but excluding accumulated reserves and surplus.– Items in the nature of provisions such as

employees provident fund, provision for taxation, depreciation , bad debts and pension fund etc are to be transferred .–Reserves dividend equalisation reserve p&l

credit balance, workmen compensation fund etc are transferred to sundry shareholders account.

– 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.

Net payment method

• Assets and liabilities taken over are not to be considered for calculation of purchase consideration.

• Issue price of shares and debentures are to be considered including premium.

• If the liquidation expenses of the amalgamating companies are paid by the new company, the same should be taken into considering for calculating purchase consideration.

• Total up all payments, made by the purchasing company to the share holders of the vendor company in various forms.

– 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.

• 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.

• 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.

• Purchasing Company Account: – Credit side: Amount of Purchase Consideration due.– Debit side: Discharge of Purchase Consideration.

•

– 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.

• Purchasing company held shares in vendor company (PV)• Calculation of purchase consideration• PC (Given/calculated) xxx• Less: % reduction for shares• Held by purchasing• company in vendor• company xxx• Net PC xxx• % = Shares held by X 100• purch. comp.• Total shares of• vendor comp.

Vendor company held shares in purchasing company (VP

Purchase considerationPC (Given/calculated) xxxLess: Value of shares Held by vendor company in purchasing company xxx Net PC xxx Value= No of shares held X Intrinsic value per

share

Both vendor and purchasing company held shares in each other (P<V)

• Calculation of purchase consideration• PC (Given/calculated) xxx• Less: % reduction for shares• Held by purchasing• company in vendor• company xxx• Less: Value of shares Held• by vendor company in• purchasing company xxx• Net PC xxx

Inter company transactions

• Usually the companies which have some interrelations among themselves, may be amalgamated.

• Inter company owings do not require any special treatment as far as the vendor company is concerned.

• Purchasing company require to pass additional entries to set off mutual debts.

• Sundry creditors Account Dr– To sundry Debtors Account

Inter company debts

The debtors account or bills receivable account of purchasing company may represent creditors or bills payable accounts of the endor company and vice versa.

In the books of vendor company no adjustment is required .In the books of new company

1. To reduce sundry debtors account and creditors accountCreditors a/c Dr

To debtors a/c2. To reduce bulls receivable account and bill payable accountBills payable a/c Dr to bills receivable a/c

Inter company stocks

• Inter company stocks include profit element which is unrealized.

• In the books of vendor no adjustment is required

• In case of purchasing company, additional entry is passed for such unrealized profit

• Goodwill / capital reserve a/c DrStock a/c

Inter company investments• At the time of amalgamation adjustment entries are

required in the books of the amalgamating company which is holding shares of another amalgamating company.

• For closing investment in shares of liquidator B Ltd at the lime of liquidation of A ltd for closing investments of Bltd

• Shares in B ltd a/c Dr(received from liquidator of B ltd.)– To investment in shares of B ltd a/cAny balance of investment in shares of B ltd account should

be transferredto sundry share holders account,as profit of loss , on realiztion of investments.

• When there is an inter company investment , the books of that company whose shares are held by other company should be closed first.

Amalgamation vs absorption

• While absorption is a process in which an existing company purchases the business of the another xompany carrying on similar business, amalgation refers to the merger of two or more existing companies into a single new company.

• In case of amalgamation both the companies go into liquidation. On the contrary in absorption only one company generally goes into liquidation.

• While a new company is formed in case of amalgamation, no new company is formed in absorption

Steps in absorption

• 1. the vendor company winds up• 2. the purchasing company takes over the assets and

liabilities of the vendor company.• The assets not taken over are disposed off and the liabilities

not taken over are paid off.3. The pc is determined in accordance with the agreement of

absorptiion.4. The method of computation of pc is the same as

amalgamation.5.PC is discharged.The books of absorbed company are closed.

Absorption

• The assets and liabilities are transferred to the absorbing company.

• The share holders are paid off their dues , mostly in shares of the absorbing company.

• In the books of purchasing company , premium payable on redemption of debentures of the liquidating company and the discount on issue of new debentures may be debited in goodwill account.

Amalgamation Vs external reconstruction

• Amalgamation: At least two companies go into liquidation.

It is a case of combination of companies.External reconstruction: Only one company goes

into liquidation. It is not a case of combiantion.

Absorption Vs External Reconstuction

Absorption

no new company is formed.The purchasing company takes over the business of one or more existing companies.It is a case of business combination .It is mainly to get the advantages of large scale operation.

External Reconstruction

A new company is formed.The business of only one company is acquired.There is no combination of business.It is to give a new life to a concern which has to be compulsorily liquidated when its business becomes illegal or when its goodwill is lost.