Amalgamation: In the Nature of Merger and Purchase

Amalgamation, as the name itself suggest, is a form of external reconstruction, in which there is a combination of two or more than two companies, either by merger or by takeover. It indicates two activities:

There is a genuine pooling not merely of assets and liabilities of the amalgamating companies but also of the shareholder interest and surplus of the business of two companies. All the assets and liabilities including reserves and surplus of the transferor company, after amalgamation, become the assets and liabilities of the transferee company. Equity shareholders of the combining entities continue to have a proportional share in the combining entity.

The business of the transferor company is intended to be carried on, after amalgamation, by the transferee company.

Pooling of Interest Method is used for accounting in the books of transferee company.

Purpose of Amalgamation

Companies go for amalgamation, for a number of reasons such as:

• Gaining synergy
• Avoiding competition
• Increasing efficiency
• Business expansion
• Reaping economies of large-scale production

The excess of the purchase consideration over the share capital of transferor company is debited to Reserve and the excess of share capital over purchase consideration is Credited to reserve.

1. Amalgamation in the nature of Merger

In this type of amalgamation, not only is the pooling of assets and liabilities is done but also of the shareholders’ interests and the businesses of these companies. In other words, all assets and liabilities of the transferor company become that of the transfer company. In this case, the business of the transfer or company is intended to be carried on after the amalgamation. There are no adjustments intended to be made to the book values. The other conditions that need to be fulfilled include that the shareholders of the vendor company holding atleast 90% face value of equity shares become the shareholders’ of the vendee company.

According to AS-14 on Accounting for Amalgamation, the following conditions must be satisfied for an amalgamation in the nature of merger:

• After amalgamation, all the assets and liabilities of the transferor company becomes the assets and liabilities of the transferee company.
• Shareholders holding not less than 90% of the face value of the equity shares of the transferor company become the equity shareholders of the transferee company by virtue of amalgamation.
• The business of the transferor company is intended to be carried on after the amalgamation by the transferee company.
• Purchase consideration should be discharged only by issue of equity shares in the transferee company except that cash may be paid in respect of any fractional shares.
• No adjustments are required to be made in the book values of the assets and liabilities of the transferor company, when they are incorporated in the financial statements of the transferee company. If any one of the conditions is not satisfied in a process of amalgamation, it will not be considered as amalgamation in the nature of merger.

2. Amalgamation in the nature of Purchase

An amalgamation will be treated as “Amalgamation in the nature of purchase” if any of the above-mentioned conditions is not satisfied.

This method is considered when the conditions for the amalgamation in the nature of merger are not satisfied. Through this method, one company is acquired by another, and thereby the shareholders’ of the company which is acquired normally do not continue to have proportionate share in the equity of the combined company or the business of the company which is acquired is generally not intended to be continued.

It is a made by which one company acquires another company and equity shareholders of the combining entities do not continue to value proportionate share in the combining entity. The business of the acquired company may not intend to be continued. Purchase Method is used for accounting in the books of transferee company.

The excess of purchase consideration over the net assets is treated as Good will and the excess of net asset over Purchase consideration is treated as Capital Reserve. In this case, Amalgamation Adjust-went A/c is not to be opened far takeover of the statutory reserve.

Procedure for Amalgamation

1. The terms of amalgamation are finalized by the board of directors of the amalgamating companies.
2. A scheme of amalgamation is prepared and submitted for approval to the respective High Court.
3. Approval of the shareholders’ of the constituent companies is obtained followed by approval of SEBI.
4. A new company is formed and shares are issued to the shareholders’ of the transferor company.
5. The transferor company is then liquidated and all the assets and liabilities are taken over by the transferee company.

Accounting of Amalgamation

• Pooling of Interests Method:

Through this accounting method, the assets, liabilities and reserves of the transfer or company are recorded by the transferee company at their existing carrying amounts.

• Purchase Method:

In this method, the transfer company accounts for the amalgamation either by incorporating the assets and liabilities at their existing carrying amounts or by allocating the consideration to individual assets and liabilities of the transfer or company on the basis of their fair values at the date of amalgamation.

Computation of purchase consideration: For computing purchase consideration, generally two methods are used:

1. Purchase Consideration using net asset method: Total of assets taken over and this should be at fair values minus liabilities that are taken over at the agreed amounts.

2. Agreed value means the amount at which the transfer or company has agreed to sell and the transferee company has agreed to take over a particular asset or liability.

Purchase consideration using payments method: Total of consideration paid to both equity and preference shareholders in various forms.

Disadvantages of Amalgamation

• Amalgamation may lead to elimination of healthy competition
• Reduction of employees may take place
• There could be additional debt to pay
• Business combination could lead to monopoly in the market, which is not always positive
• The goodwill and identity of the old company is lost