AMALGAMATION , ABSORPTION AND EXTERNAL RECONSTRUCTION OF COMPANIES.

According to AS-14 amalgamation includes absorption and external reconstruction.

Amalgamation refers to the formation of a new company to purchase two or more existing companies which go into liquidation.
It is the merger of two or more existing companies in to a single company.
Absorption refers to a situation when an existing company take over the business of one or more existing companies
External reconstruction refers to a situation in which a new company is formed to take over the business of an existing company.
Objectives of amalgamation.
1. To eliminate competition 2. To dominate the market 3. To collect additional capital
4. To enjoy the benefits of large scale production 5. To promote research and development 6. To promote better management
7. To save capital expenditure.
Disadvantages.
Possibility of increased wastage , Growth of monopoly, Defects over capitalisation, Difficulty in coordination and control, Lack of
personnel initiative.
Purchase consideration.
Amount payable by the purchasing co. (transferor) to the vendor co. (transferee) as a consideration for the purchase of business
Methods.
Lump sum method, 2. Net payment method, 3. Net asset method, 4. Share exchange method or Intrinsic value method
Intrinsic value of shares means Net assets/no. of shares.
Net assets means all assets – out side liabilities, Assets do not include fictitious assets.
Fraction shares.
At the time of calculating purchase consideration sometimes we may get fraction shares.
shares cannot be issued in fraction, Such shares should be valued at market price (not at face value) and should be settled in
cash.
Types of amalgamation.
AS-14 amalgamation is of two types,
1. Amalgamation in the nature of merger, 2. Amalgamation in the nature of purchase.
Amalgamation in the nature of merge .
Conditions,
• All the assets and liabilities of the transferor company should become the assets and liabilities of the transferee
company after amalgamation.
• Share holders holding not less than 90 % of the shares of the transferor company should become the share holders of
the transferee co.
• consideration payable to the transferor company should be made by way of shares only and cash can be paid only for
fraction shares.
• Business of the transferor company is indented to be continued by the transferee co.
• No adjustment is indented to be made in the book value of assets and liabilities, when they are incorporated in the
book of transferee co.
Amalgamation in the nature of purchase.
• Amalgamation which does not satisfy any of the above condition, is termed as amalgamation in the nature of purchase.
• ie. If amalgamation is to be in the nature of merger all the conditions should be satisfied.
• Therefore, majority of the amalgamations are in the nature of purchase.
Accounting in the book of transferee company.
AS-16- accounting procedure differ depending on the type of amalgamation.
1. Pooling of interest method (amalgamation in the nature of merger).
2. Purchase method (amalgamation in the nature of purchase).
Pooling of interest method (amalgamation in the nature of merger).
1. The assets, liabilities, reserves (capital of revenue) should be recorded in the financial statements of the transferee co
at their carrying cost and in the same form as at the date of amalgamation.
2. The difference between the amount recorded ass share capital issued plus any additional consideration payable and
the share capital of the transferor company should be adjusted in the reserves.
3. If at the time of amalgamation , the transferor and transferee companies have conflicting accounting policies, a
uniform set of accounting policy should be followed after amalgamation. (AS- 5).
Purchase method.
is used in the case of amalgamation in the nature of purchase.

Dr. Rajesh Kumar. E. R, Associate Professor of Commerce, N.A.M College, Kallikkandy

Email. rajeshsirnam@gmail.com mob. 9447345214
 • Only assets and liabilities which are agreed to be taken over are recorded in the book of transferee company and are
recorded at their agreed value.
• Reserves (capital or revenue) other than statutory reserves are not included in the financial statements of transferee
company.
• difference between purchase consideration and net asset should be recognised as goodwill or capital reserve and
should be brought into the books of the transferee co.
• goodwill arising from the amalgamation should be amortised over its useful life. The period should not exceed five
years unless a longer period is justified.
Statutory reserves required by law like Development allowance reserve, investment allowance etc. should be recorded in the
book of transferee company by using amalgamation adjustment account. Amalgamation adjustment account is disclosed in the
balance sheet as a deduction from statutory reserve. When the statutory reserve is no longer required it should be written off
by crediting the amalgamation adjustment account.
• Difference between pooling of interest method and purchase method.
• Applicability .
• Amalgamation in the nature of merger- amalgamation in the nature of purchase.
• Incorporation of assets and liabilities.
• All assets and liabilities- only agreed assets and liabilities.
• Value of assets and liabilities.
• At book value- at agreed value.
• Aggregation of financial statements.
• All assets, liabilities and reserves – only assets and liabilities agreed and statutory reserve only.
• Goodwill or capital reserve.
• No goodwill or capital reserve - difference between pc and net asset is goodwill or capital reserve.
• Amalgamation adjustment a/c.
• No such account – such account is opened for incorporating statutory reserve.
Disclosure in financial statements
1. For all amalgamations, the following disclosure should be made in the first statements following the amalgamation:-
a. Names and general nature of the amalgamating companies.
b. Effective date of amalgamation.
c. Method of accounting used to reflect the amalgamation.
d. Particulars of schemes sanctioned under statute.
For amalgamation accounted under the pooling of interest method.
a. Description and number of shares issued.
b. The amount of any difference between the consideration and the value of net assets acquired and the treatment
thereof.
For amalgamation under purchase method.
a. Consideration for amalgamation and the description of the consideration paid or payable.
b. Amount of any difference between the consideration and the net assets and the treatment thereof including the period of
amortisation of any goodwill arising on amalgamation.
Dissenting shareholders.
Share holders who has not given their assent to the scheme of amalgamation.
Accounting treatment in the book of transferor company.
1. Transfer the paid up share capital held by the dissenting share holders in to a separate account called dissenting
shareholders a/c.
2. Any premium they receive or any discount they suffer should be transferred to realisation a/c.
3. The profit or loss on realisation and all items relating to reserve and accumulated loss should be transferred to the.
majority share holders a/c.
4. 4. Amount due to dissenting share holders should be settled in cash.
Inter company Owings.
1. At the time of amalgamation when one company owe money to another company it is inter company owing.
2. After amalgamation as both the companies become one entity, this inter company owing should be eliminated in the books of
transferee company.
Sundry creditors a/c Dr.
To, sundry debtors.
Inter-company unrealised profit.

Dr. Rajesh Kumar. E. R, Associate Professor of Commerce, N.A.M College, Kallikkandy

Email. rajeshsirnam@gmail.com mob. 9447345214
 1. When the purchasing company has sold goods to the vendor company.
If these goods remain in the stock of vendor company, it will be at selling price (cost +profit to the purchasing company)
A company cannot show its own goods at the financial statement at a profit.
Accounting treatment.
In the book of transferor (vendor) co.
Stock a/c will be closed in the usual manner by transferring it to the realisation a/c.
In the book of transferee (purchasing) co.
While taking over the assets, the stock should be recorded at cost price the difference (unrealised profit) will be automatically
adjusted in the goodwill or capital reserve.
. When the vender company has sold goods to the purchasing company and remain in the stock of purchasing company.
• No adjustment is required in the book of vendor company.
• in the book of purchasing company the unrealised profit in the stock of purchasing company should be adjusted
immediately after amalgamation.
Goodwill/ capital reserve a/c Dr.
To, Stock a/c (with the amount of unrealised profit).
Inter-company holding.
1. Purchasing company holds share in the vendor company.
The purchase consideration payable will be reduced proportionately as a part of the purchase consideration is receivable to the
purchasing company.
Purchasing company pays only the consideration payable to outside share holders.
Accounting treatment.
In the book of transferor co. (vendor).
Purchase consideration calculated for the entire under taking.
Purchasing company account Dr.
To, realisation.
(Full purchase price).
Shares/debentures/cash a/c Dr.
To, Purchasing co.
(amount actually received- out side share holders portion).
The balance in the purchasing co a/c and share holder a/c closed mutually.
Share holders a/c Dr.
To, Purchasing co.
In the book of purchasing co (transferee co).
Entry for purchase of business is passed in the usual manner.
For payment of purchase consideration.
Liquidators of vendor co a/c Dr.
(total purchase consideration)
To, share capital/ Debentures/bank a/c.
(amount payable to outsiders).
To, shares in the vendor co (investment) a/c
(amount due to transferee co).
Any difference in the shares in vendor company account (investment a/c) will be closed by transferring to goodwill or capital
reserve a/c.
Shares held by the vendor co (transferor co) in the purchasing co (transferee co).
 The purchasing company cannot purchase its own shares.
 If net payment method is adopted, the shares already acquired by the vendor company should be deducted from the
shares to be issued.
 The shares already held are treated as a part of purchase consideration.
 The investment in shares of the purchasing co (in the book of vendor) will not be taken over by the purchasing co and
should not be closed by transferring to realisation a/c.
 Shares received as purchase consideration should be transferred to investment account (debited).
 If the issue price of share issued now differ with the previous shares the shares should be re valued and the profit or
loss is to be transferred to share holder’s a/c.
 If the purchase consideration is calculated under the net asset method the assets in the form of shares in the
purchasing co should not be taken in to consideration.

Dr. Rajesh Kumar. E. R, Associate Professor of Commerce, N.A.M College, Kallikkandy

Email. rajeshsirnam@gmail.com mob. 9447345214
Shares held by both the companies in each other (mutual holdings or cross holdings).
Calculation of purchase consideration depends on the method of calculating purchase consideration.
Net payment method.
 Calculate the number of shares to be issued to the outside share holders in the vendor company.
 Calculate the number of shares to be issued to the purchasing co as a a share holder of the vendor co.
( however these shares will not be issued).
 Add the above two and obtain the total.
 Deduct the number of shares already held by the vendor co.
 Shares arrived at above X issue price = purchase consideration.
 Net asset method.
 Purchase consideration is calculated by using simultaneous equations.
 a) Calculate total value of assets of each co by algebraic equation.
 b) Deduct the proportionate value of assets available to the transferee company from the total assets of the transferor
company (a).
 c) Deduct the shares of transferee company already held by the transferor company.

Dr. Rajesh Kumar. E. R, Associate Professor of Commerce, N.A.M College, Kallikkandy

Email. rajeshsirnam@gmail.com mob. 9447345214