AMALGAMATIONABSORBTION

ANDRECONSTRUCTION

A PRESENTATION ON

MEANING OF AMALGAMATION

•Amalgamation is a form of combination.

•It is brought about by the fusion of blending

of two or more undertakings carrying on

the same type of business ,or engaged in the

same line of business activity.

OBJECTIVES OF AMALGAMATION

a) Elimination of competitionb) Production of goods and services on a large

scale c) Securing a large share of a marketd) Maintaining price by regulating outpute) Equitable distribution of what is produced

OBJECTIVES CONTD……

f) Building up goodwillg)Securing economies of scale such as

technical,financial,managerial and marketing

h)Avoiding duplications and reducing costsi) Introducing schemes of rationalisationj) Promoting research and development

AMALGAMATION AND ABSORPTION

• Although absorption is brought about by the merger of one or more companies with an existing company, and result is one liquidation.• amalgamation is of two types amalgamation in the nature of merger and amalgamation in the nature of purchase

TERMS USED IN AS-14

a) AMALGAMATION means an amalgamation pursuant to the provisions of the company act,1956.

b)TRANSFEROR COMPANY means the company which is amalgamated into another company

c) TRANSFREE COMPANY means the company into which the transferor company is amalgamated

TERMS USED IN AS-14 CONTD….

d)CONSIDERATION for the amalgamation means the aggregate of the shares and other securities issued and payment made in the form of cash or other assets by the transferee company to the shareholders of the transferor company.

AMALGAMATION IN THE NATURE OF PURCHASE

• An amalgamation ,as per the accounting standard (as-14) ,should be considered to be in the nature of purchase, when any one or more of the conditions for an amalgamation in the nature of merger specified above is not satisfied.

PURCHASE CONSIDERATION

• “CONSIDERATION FOR THE AMALGAMATION MEANS THE AGGREGATE OF THE SHARES AND OTHER SECURITIES ISSUED AND THE PAYMENT MADE IN THE FORM OF CASH OR OTHER ASSETS BY THE TRANSFERRE COMPANY TO THE SHARE HOLDERS OF THE TRANSFEROR COMPANY”.

• Purchase consideration should comprise shares and other securities issued as well as cash payment to the shareholders of the transferor company but not made any payment made to liquidate.

NET ASSETS METHORD

Net assets being excess of assets over liabilities taken over ,if purchase consideration is to be ascertained under the net assets method ,it is necessary to determine the fair value of such of those assets and liabilities as are actually taken over.

TREATMENT OF LIABILITIES

•The liabilities to be deducted from out of the total assets taken over by the transferee company are only outside or liabilities to third parties.

•These include trade liabilities such as sundry creditors and bills payable , outstanding liabilities for expenses ,secured and unsecured loans such as debentures and bank overdraft ,liabilities to workmen such as workmen’s savings deposits ,provident fund ,profit -sharing fund, gratuity fund ,etc.

TRANSFEROR COMPANY JOURNAL ENTRIES

i. for transfer of assets taken over: realisation A/c to each asset A/c

Dr. (with total)(with book value)

ii. For transfer of liabilities of liabilities taken over: each liability A/c to realisation A/c Dr. (with book value)

(with total)

iii. For purchase consideration due: transferee company A/c to realisation A/c

Dr. (with the amount agreed upon)

iv. For expenses of realisation: realisation A/c to bank A/c(when paid for by the transferor company)

Dr. (with the amount paid)

TRANSFERRE COMPANY JOURNAL ENTRIES( POOLING OF INTEREST METHOD)

i. For purchase consideration due business purchase A/c to liquidator of transferor company

Dr.

ii. For taking over assets and liabilities each asset A/c to each asset A/c to provision A/c to profit and loss A/c to reserve A/c to business purchase A/c

Dr.(with book value) (with book value) (with book value) (with book value)(with purchase consideration)

iii. for payment of purchase consideration liquidator of transfer Co. A/c to share capital A/c to share premium A/c to bank A/c

Dr. (with purchase consideration)

(for fractional shares or Dissenting shareholders)

iv. For realisation expenses borne: liquidation expenses A/c to bank A/c

Dr.

Profit and loss A/c to liquidation expenses A/c Dr.

v. For formation expenses: preliminary expenses A/c to bank A/c

Dr.

PURCHASE METHOD JOURNAL ENTRIES

i. For purchase consideration due: business purchase A/c to liquidator of transferor Co.

Dr.

ii. For assets and liabilities taken over: each asset A/c to each liability A/c to business purchase A/c

Dr. (fair value)(fair value)

iii. for discharge of purchase consideration: liquidator of transferor Co. A/c to share capital A/c to share premium a/c to debentures A/c to bank A/c

Dr.

iv. For realisation expenses borne: goodwill A/c to bank A/c

Dr. (with the expenses)

v. For preliminary expenses: preliminary expenses A/c to bank A/c

Dr.

Companies A and B engaged in a similar business, agreed to amalgamate on 1st April 2003.their position on 31st march 2003 was as follows

CALCULATION OF PURCHASE CONSIDERATION

A CO. LTD.

1,500 shares of Rs 50 each Rs 25 paid upReserveCreditorsProfit and loss A/c

Rs37,5002,7501,7501,000

43,000

LandMachineryStockDebtorsCashgoodwill

6,0009,7507,5004,00075015,000

43,000

B CO.LTD

1,500 Shares of Rs 50 each. Rs 25 paid upDepreciation fundCreditorsProfit and Loss A/C

Rs25,000

1,2501,7501,250

LandMachineryStockDebtorsCash

Rs6,90012,5006,0002,6001,250

29,250 29,250

The assets and liabilities are to be transferred at book figures to the company .the capital of the new company is to be Rs 1,00,000 divided into 10,000 equity shares of Rs 5 each and 10,000 preference shares or Rs 5 each. The new company issued all the equity shares and preference shares to the extent necessary to the members of A and B companies.6,500 preference shares were taken up by the public at par and were fully paid. Compute the purchase consideration

solution:

A co ltdLandMachineryStock debtorsCashGoodwill assets taken over less: liabilities: creditors depreciation fund purchase consideration

Rs6,0009,7507,5004,00075015,000

43,0001,750

41,250

B co ltd Rs6,90012,5006,0002,6001,250

29,250

3,00026,250

1,7501,250