Accounting Treatment in the books of Transferor and Transferee Companies

Accounting Treatment in the Books of Transferor/Vendor Company:

So far as the books of the transferor company are concerned, the normal procedures are to be followed for closing the books of account through Realisation Account. It should be noted that the Accounting Standard (AS-14) deals with the accounting procedures only in the books of the transferee company.

In case of amalgamation the transferor company has to wind up its business and hence it will dispose off its assets, pay its liabilities and distribute the surplus if any among its shareholders. It is done through opening a new account known as Realisation Account. In order to close the books of account of the transferor company, the following steps (along with their journal entries) are required:

Step 1:

Open a Realisation Account, transfer all assets and liabilities (excluding fictitious assets) to this account.

Journal Entry:

For transferring different assets to Realisation Account.

1. Realisation A/c Dr. (with total)

  To Sundry assets (individually) (with their individual values)

Points to be noted:

(a) Fictitious assets, such as preliminary expenses, discount on issue of shares and debentures, debit balance of Profit and Loss Account etc. are not transferred to Realisation Account.

(b) In tangible assets such as goodwill, patents, trademarks etc. are also transferred to Realisation Account.

(c) The cash and bank balances should not be transferred to Realisation Account if these are not taken over by the purchasing company.

(d) An asset against which a provision or reserve has been created should be transferred at its gross figure and not at its net figure e.g. debtors.

Step 2:

For transferring different liabilities to Realisation Account.

Sundry Liabilities Dr. [with their individual book values]

  To Realisation A/c [with the total]

Points to be noted:

(i) Items in the nature ‘Provisions’ (e.g. Provision for taxation, Employees provident fund, Pension Fund, Provision for doubtful debts, Provision for Depreciation) should be transferred to Realisation Account.

(ii) Items in the nature of ‘Reserve’ are not to be transferred to Realisation Account. These are directly transferred to sundry shareholders account (e.g. workmen compensation fund, credit balance of profit and loss account).

(iii) A liability against which a provision or reserve has been created should be transferred at its gross figure e.g. creditors.

Step 3:

For realising assets which have not been taken over by the purchasing company.

Cash or Bank Account Dr. (with the amount realised)

  To Realisation account

Step 4:

For discharging liabilities, which have not been taken over by the purchasing company.

Realisation A/c Dr. (with the amount paid)

  To Cash

Step 5:

To record liquidation expenses

(a)	If these expenses are borne by the transferor company	Journal Entry Realisation Account	Dr.
		To Bank

(b)	If these are paid by the purchasing companies directly	No Entry
©	If these expenses are first paid by the transferor company and later reimbursed by the transferee company
	1. On Payment by the transferor company	Transferee company’s account    To Realization account	Dr.
	2. On reimbursement	Bank Account       To Realization account	Dr.

Step 6:

For Receiving Purchase Consideration

Cash/Bank Account	Dr.	With cash received
Preference Shares in Purchasing Company	Dr.	With issue price of preference shares
Equity Shares in Purchasing Company	Dr.	With issue price of equity shares With the total
To Transferee Company

Step 7:

Discharge the claims of preference shareholders and transfer the difference between the amount actually payable and the book figure to Realisation Account

Journal Entries for making the payment due:

Step 8:

Ascertain the profit/loss on realisation and transfer the same to equity shareholders account

In Case of Profit	Realisation Account (With profit)    To Equity Shareholders Account
In case of loss	Equity Shareholders Account             To Realisation Account (With loss)

Step 9:

Transfer Equity share capital, Accumulated profits and Reserves shown in the Balance Sheet (just before date of amalgamation) to Equity Shareholders Account

Equity Share Capital Account	Dr.	With paid up value of Share Capital
Profit and Loss Account	Dr.	With credit balance of profit and loss Account
General Reserve Account	Dr.	If Any

Workmen Compensation fund Account	Dr.	If any
Capital Reserve Account	Dr.	If any
Dividend Equalisation Fund Account	Dr.	If any
Securities Premium Account	Dr.	If any
Debenture Redemption Reserve Account	Dr.	If any
Capital Redemption Reserve Account	Dr.	If any
To Equity Shareholders Account		With total

Step 10:

Transfer Accumulated losses (shown on debit side of Balance Sheet just before amalgamation)

Equity Shareholders Account	Dr.
To Profit and Loss Account		Debit balance
To Preliminary Expenses Account		If Any
To Discount on issue of Shares/Debentures		If Any
To deferred Revenue Expenditure Account		If Any

Step 11:

Make the final payment to equity shareholders

Equity Shareholders Account	Dr.	With total
To Equity shares in transferee company’s Account		No. of Shares issued X Issue price per share
To Cash/Bank Account		With cash paid

Notes:

1. After passing the above-mentioned entries in books of Transferor Company, all the accounts will be closed and not a single account will show any balance.
2. The net amount payable to equity shareholders must be equal to the amount of shares in Transferee Company and cash and bank balance left after the discharge of all outsiders’ liabilities and claims of preference shareholders.

Accounting Treatment in Books of Transferee Company or Purchasing Company:

Accounting treatment in books of Transferee Company depends upon the type of amalgamation.

As per AS-14, there are two methods of accounting for amalgamation:

1. Pooling of Interest Method:

Applicable in case of Amalgamation in the nature of merger.

2. Purchase Method:

Applicable in case of Amalgamation in the nature of Purchase.

Pooling of Interest Method (as per AS-14):

The following are the salient features of pooling of interest method:

1. All assets, liabilities and reserves of the transferor company are recorded by the transferee company at their existing carrying amounts (book values) except in cases where these are to be adjusted to follow uniform set of accounting policies.
2. The identity of the reserves is preserved as they appear in financial statements of the transferee company. For example, the general reserve of the transferor company becomes the general reserve of the transferee company, the capital reserve of the transferor company becomes the capital reserve of the transferee company and the revaluation reserve of the transferor company becomes the capital reserve of the transferee company.
3. No goodwill account should be accounted for as a result of amalgamation in the books of the transferee company.
4. The difference between the amount of share capital issued (plus any additional consideration in the form of cash or other assets) and the amount of share capital of Transferor Company should be adjusted in reserves in the financial statements of the transferee company.
5. The balance of profit and loss account appearing in the financial statements of the transferor company is aggregated with the corresponding balance appearing in the financial statements of the transferee company.
6. Although AS-14 does not specifically state, the purchase consideration under this method is to be valued at par value of shares issued. The logic is that this method considers book values and not the fair values.