Amalgamation in the Nature of Merger and Purchase

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 is a unification of two or more companies into a single entity, where:

• All the assets, liabilities, and reserves of the transferor company are transferred to the transferee company.

• The shareholders of the transferor company continue to have a proportionate shareholding in the transferee company.

• The business of the transferor company is intended to continue.

This type of amalgamation reflects a genuine pooling of interests where the identity of the combining companies is retained in spirit, if not in form.

Key Characteristics

According to AS 14, an amalgamation is considered to be in the nature of merger if all the following conditions are met:

1. All assets and liabilities of the transferor company become assets and liabilities of the transferee company.

2. Shareholders holding at least 90% of the face value of equity shares in the transferor company become equity shareholders of the transferee company.

3. The consideration is discharged solely by equity shares, except for cash paid for fractional shares.

4. The business of the transferor company is intended to be carried on by the transferee company.

5. No adjustment is made to the book values of assets and liabilities, except to bring uniformity in accounting policies.

Accounting Treatment – Pooling of Interests Method

Under the Pooling of Interests Method, the books of the transferee company reflect:

• Assets and liabilities of the transferor company at existing book values.

• Reserves of the transferor company as they are, and not transferred to the Profit & Loss account.

• No goodwill or capital reserve is recorded.

• 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.

• A Ltd. and B Ltd. decide to merge and form a single company, A Ltd. (B Ltd. is absorbed).

• All assets and liabilities of B Ltd. are taken over by A Ltd.

• 95% of the shareholders of B Ltd. are issued equity shares in A Ltd.

• No purchase consideration is paid in cash.

• Business of B Ltd. is continued by A Ltd.

Since all five conditions are satisfied, this amalgamation is in the nature of merger.

Amalgamation in the Nature of Purchase

Amalgamation in the nature of purchase refers to a situation where one company acquires another and takes over its assets and liabilities, but the acquisition does not meet the criteria of a merger.

Here, the identity of the transferor company is dissolved, and the shareholders of the transferor company may or may not become shareholders of the transferee company. The business of the transferor company may or may not be continued.

Key Characteristics:

If any one of the five conditions required for a merger is not satisfied, then the amalgamation is treated as a purchase. In such a case:

• The transferee company may selectively take over assets and liabilities.

• Consideration may be paid in cash, shares, debentures, or a combination.

• Shareholders of the transferor company may not receive equity shares in the transferee company.

• The business of the transferor company may be discontinued or modified.

• Adjustments are made to asset values, and reserves are not carried forward.

Accounting Treatment – Purchase Method:

Under the Purchase Method, the transferee company:

• Records assets and liabilities at fair market value (not book value).

• Does not carry over reserves of the transferor company (except statutory reserves).

• 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:

• X Ltd. acquires Y Ltd. by paying ₹50 lakh in cash and taking over only selected assets.

• Only 60% of Y Ltd.’s equity shareholders become shareholders of X Ltd.

• Y Ltd.’s business is discontinued after acquisition.

• 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