by Amalgamation is a strategic process in corporate restructuring where two or more companies combine to form a new entity or where one company is absorbed by another. The primary motive behind amalgamation is to achieve synergy, expand operations, eliminate competition, and enhance market reach. In accounting and legal terms, amalgamation is governed by the Companies Act, 2013, and is treated as per the accounting standard AS 14 – Accounting for Amalgamations.
AS 14 classifies amalgamation into two broad categories:
1. Amalgamation in the Nature of Merger
2. Amalgamation in the Nature of Purchase
Each type has distinct accounting treatments, legal conditions, and strategic implications, which are discussed in detail below.
Amalgamation in the Nature of Merger
Amalgamation in the nature of merger refers to a form of business combination in which two or more companies combine to form one single company and the business of the transferor company (selling company) is taken over by the transferee company (purchasing company). In this type of amalgamation, the companies are integrated in such a way that the identity of the transferor company is not treated as sold but as continued in the new or existing company. It is treated as a unification of business rather than a purchase.
Essential Conditions
For an amalgamation to be considered in the nature of merger, certain conditions must be satisfied:
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All the assets and liabilities of the transferor company become the assets and liabilities of the transferee company.
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Shareholders holding at least 90% of the equity shares of the transferor company become equity shareholders of the transferee company.
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Consideration is discharged only by issue of equity shares (except for fractional cash adjustments).
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The business of the transferor company is continued by the transferee company.
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No adjustment is made to the book values of assets and liabilities except to bring uniformity in accounting policies.
Characteristics of Amalgamation in the Nature of Merger
- Transfer of All Assets and Liabilities
In amalgamation in the nature of merger, the transferee company takes over all assets and all liabilities of the transferor company. Nothing is left behind in the old company. Fixed assets, current assets, investments, reserves, and obligations such as creditors and loans are completely transferred. This shows that the business is not purchased partially but combined fully. The transfer ensures continuity of operations and legal responsibilities. The transferee company becomes responsible for all contracts and commitments previously made by the transferor company.
- Shareholders Become Shareholders of Transferee Company
At least 90% of the equity shareholders of the transferor company must become equity shareholders of the transferee company. This condition proves that ownership of business continues and is not sold to outsiders. Shareholders receive equity shares in exchange for their old shares and participate in future profits. Because the owners remain substantially the same, the transaction is considered a merger rather than a purchase. The continuity of ownership is the most important feature distinguishing merger from absorption.
- Consideration Paid Only in Equity Shares
The purchase consideration is discharged mainly by issue of equity shares of the transferee company. Cash payment is not normally made except for fractional share adjustments. This ensures that shareholders of the transferor company continue to hold an ownership interest in the combined business. Payment in equity shares confirms that the business is unified and not acquired for money. It also helps the transferee company conserve cash and maintain liquidity after amalgamation.
- Continuation of Business
After amalgamation, the business of the transferor company is continued by the transferee company. The same nature of operations, products, customers, and activities are maintained. There is no intention to liquidate or discontinue the business. Employees, contracts, and operations are usually retained. This continuity proves that the amalgamation is a merger of businesses rather than a closing down or selling of operations. The aim is long-term cooperation and growth of the combined enterprise.
- No Revaluation of Assets and Liabilities
In a merger, assets and liabilities are recorded at their existing book values. No revaluation is made to increase or decrease their value. This is because the transaction is not considered a purchase but a continuation of business. Revaluation would create artificial profits or losses. Therefore, the balance sheet values remain unchanged, ensuring comparability of financial statements before and after amalgamation.
- Use of Pooling of Interest Method
Accounting for amalgamation in the nature of merger is done by the Pooling of Interest Method. Under this method, financial statements of both companies are combined as if they were always a single entity. Assets, liabilities, and reserves are simply added together. The method avoids creation of goodwill and maintains historical accounting records. It reflects the true spirit of partnership between companies rather than acquisition.
- Preservation of Reserves
All reserves of the transferor company, such as general reserve, capital reserve, and profit and loss balance, are carried forward in the books of the transferee company. These reserves are not written off. This preserves the financial history of the business and benefits shareholders because accumulated profits remain available for dividend or future use. The continuity of reserves is an important sign of a genuine merger.
- No Recognition of Goodwill or Capital Profit
Normally no goodwill or capital profit arises because the purchase consideration equals the share capital taken over. Since the transaction is not treated as a purchase, the difference between net assets and consideration is not recognized as gain or loss. The accounting objective is continuity rather than valuation. Therefore, goodwill or capital reserve is generally avoided.
- Unified Management and Control
After amalgamation, management and control of both companies are combined. Directors and key executives from both companies may participate in administration. The combined company functions as a single unit with one policy and decision-making authority. This unified management increases coordination, efficiency, and operational effectiveness, which is a major objective of merger.
- Continuity of Business Identity
In amalgamation in the nature of merger, the business identity of the transferor company is not lost completely. Though legally dissolved, its operations, shareholders, and financial records continue in the transferee company. The combined enterprise is treated as a continuation of both companies. Because of this continuity, the transaction is regarded as a partnership or integration rather than an acquisition.
Accounting Treatment of Pooling of Interests Method
Amalgamation in the nature of merger is accounted for by the Pooling of Interest Method. Under this method, the assets, liabilities, and reserves of the transferor company are recorded by the transferee company at their existing book values. No revaluation of assets or liabilities is done because the business is treated as a continuation.
All reserves such as General Reserve, Profit and Loss Account, and other accumulated balances of the transferor company are carried forward and appear in the books of the transferee company. This preserves the financial position and past records of the business.
Under the Pooling of Interests Method, the books of the transferee company reflect:
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Assets and liabilities of the transferor company at existing book values.
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Reserves of the transferor company as they are, and not transferred to the Profit & Loss account.
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No goodwill or capital reserve is recorded.
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The difference in share capital is adjusted against reserves.
This method ensures continuity in financial reporting and is often preferred for strategic mergers between equals.
Example
Let’s consider two companies – A Ltd. and B Ltd.
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A Ltd. and B Ltd. decide to merge and form a single company, A Ltd. (B Ltd. is absorbed).
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All assets and liabilities of B Ltd. are taken over by A Ltd.
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95% of the shareholders of B Ltd. are issued equity shares in A Ltd.
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No purchase consideration is paid in cash.
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Business of B Ltd. is continued by A Ltd.
Since all five conditions are satisfied, this amalgamation is in the nature of merger.
Accounting Treatment of Goodwill or Capital Reserve
In this type of amalgamation, goodwill or capital reserve normally does not arise because the purchase consideration is equal to the share capital of the transferor company. If any difference occurs, it is adjusted in reserves rather than treated as goodwill. The objective is to maintain continuity of business and not to show acquisition profit or loss.
Journal Entries in the Books of Transferee Company
1. For recording assets and liabilities taken over
Business Purchase A/c Dr.
To Liquidator of Transferor Company A/c
2. For incorporating assets and liabilities at book value
Assets A/c Dr.
To Liabilities A/c
3. For payment of purchase consideration (issue of shares)
Liquidator of Transferor Company A/c Dr.
To Equity Share Capital A/c
Features
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It represents a genuine combination of companies.
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Shareholders of transferor company become shareholders of transferee company.
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Business operations continue without interruption.
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Book values are maintained and reserves are preserved.
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No gain or loss on acquisition is recognized.
Amalgamation in the Nature of Purchase
Amalgamation in the nature of purchase refers to a type of business combination in which one company acquires another company and takes over its business. In this case, the transferor company (selling company) is treated as being purchased by the transferee company (purchasing company). The transaction is similar to buying a business, and the shareholders of the transferor company generally do not continue as owners in the same proportion. Therefore, it is considered an acquisition and not a true merger.
Characteristics of Nature of Purchase
- Acquisition of Business
In this type of amalgamation, the transferee company acquires the business of the transferor company just like a buyer purchases a running business. The relationship between the two companies is that of purchaser and vendor. The transferor company does not continue as a partner in the combined entity. The purpose is expansion, control, or gaining market advantage. Therefore, the transaction is treated as a purchase and not as a unification of equal companies.
- Transfer of Selected Assets and Liabilities
The transferee company is not required to take over all assets and liabilities of the transferor company. It may choose only specific assets and certain liabilities according to the agreement. Unwanted or risky obligations can be left behind in the transferor company. This flexibility is an important feature because it allows the purchasing company to acquire only profitable parts of the business and avoid unnecessary risks or losses.
- Shareholders Do Not Continue Ownership
Shareholders of the transferor company generally do not become equity shareholders of the transferee company in the same proportion. They are paid purchase consideration in cash, shares, debentures, or a combination of these. Because ownership is not continued, the transferor company loses its identity and is liquidated. This absence of continuity of ownership clearly distinguishes purchase from merger.
- Consideration Paid in Various Forms
Purchase consideration may be paid in equity shares, preference shares, debentures, cash, or other securities. There is no restriction that payment must be only in equity shares. The purchasing company may even pay entirely in cash. This flexibility confirms that the transaction is an acquisition rather than a partnership arrangement and allows the transferee company to design payment according to its financial position.
- Revaluation of Assets and Liabilities
In amalgamation in the nature of purchase, assets and liabilities of the transferor company are recorded at agreed or revised values. They are not necessarily recorded at book value. The transferee company may increase or decrease values to reflect fair market price. This revaluation ensures that the assets are recorded at realistic amounts in the new books of accounts.
- Application of Purchase Method
Accounting treatment follows the Purchase Method. The transferee company records only the assets and liabilities taken over and ignores those not acquired. Financial statements are not combined as in merger. Instead, the acquisition is treated like buying a separate business. This method clearly recognizes the difference between old and new entity.
- Reserves Not Carried Forward
Reserves such as general reserve, profit and loss balance, and other accumulated profits of the transferor company are not transferred to the books of the transferee company. Only statutory reserves may be recorded if required by law. Since the business is considered purchased, the past financial history of the transferor company is not continued.
- Recognition of Goodwill or Capital Reserve
Difference between purchase consideration and net assets taken over results in goodwill or capital reserve. If consideration exceeds net assets, goodwill arises representing reputation and future earning capacity. If net assets exceed consideration, capital reserve arises showing a gain on purchase. This is a typical feature of acquisition accounting.
- Discontinuance of Transferor Company
After completion of the transaction, the transferor company is liquidated and dissolved. Its legal existence comes to an end because its business has been sold. The transferee company becomes the sole owner of the acquired business and operates it under its own name and policies.
- Independent Management Control
Management and control remain entirely with the transferee company. The purchasing company makes all decisions regarding operations, policies, and administration. Directors or managers of the transferor company may or may not be retained. The combined business operates under a single authority, showing clear acquisition rather than cooperation.
Accounting Treatment – Purchase Method
Under the Purchase Method, the transferee company:
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Records assets and liabilities at fair market value (not book value).
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Does not carry over reserves of the transferor company (except statutory reserves).
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Recognizes the difference between the purchase consideration and net assets taken over as goodwill (if consideration > net assets) or capital reserve (if consideration < net assets).
This method reflects a new ownership and often results in changes in financial position due to revaluation.
Example:
Consider another case:
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X Ltd. acquires Y Ltd. by paying ₹50 lakh in cash and taking over only selected assets.
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Only 60% of Y Ltd.’s equity shareholders become shareholders of X Ltd.
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Y Ltd.’s business is discontinued after acquisition.
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Asset values are revalued at the time of acquisition.
This transaction fails to meet the conditions of merger and hence qualifies as an amalgamation in the nature of purchase.
Comparison Between Merger and Purchase
| Basis | Nature of Merger | Nature of Purchase |
|---|---|---|
| Legal Form |
Unification |
Acquisition |
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Transfer of Assets/Liabilities |
All assets and liabilities |
Selected assets and liabilities |
|
Shareholder Continuity |
90% equity shareholders continue |
Not necessary |
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Consideration Type |
Only equity shares |
Cash, shares, or other forms |
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Accounting Method |
Pooling of Interests |
Purchase Method |
|
Reserves |
Retained |
Not carried forward |
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Goodwill/Capital Reserve |
Not recorded |
Arises due to difference in net assets |
|
Business Continuity |
Must continue |
May or may not continue |
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