by The preparation of financial statements after a merger involves consolidating the accounts of the transferor and transferee companies into a single entity. The process differs based on the method of accounting used—Pooling of Interest Method or Purchase Method, as per AS-14 (Accounting for Amalgamations) or IND AS-103 (Business Combinations). The merged entity is required to prepare a fresh set of financial statements reflecting the unified financial position, performance, and cash flows.
Identify the Method of Accounting:
There are two main methods of accounting for mergers:
a) Pooling of Interest Method
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Used when the merger is in the nature of amalgamation.
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Assets, liabilities, and reserves of the transferor company are recorded at book values.
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Reserves are preserved and carried forward.
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No goodwill or capital reserve arises.
b) Purchase Method
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Used when the merger is in the nature of purchase.
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Assets and liabilities are recorded at fair values.
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Reserves (except statutory reserves) are not carried over.
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The difference between purchase consideration and net assets is adjusted as goodwill or capital reserve.
Steps in Preparation of Financial Statements:
a) Record Business Purchase
A journal entry is passed to record the business purchase:
Business Purchase A/c Dr.
To Liquidator of Transferor Company A/c
This entry records the consideration agreed upon for the acquisition.
b) Record Acquisition of Assets and Liabilities
The next step involves incorporating the individual assets and liabilities of the transferor:
Individual Assets A/c Dr.
To Individual Liabilities A/c
To Business Purchase A/c
Under the Purchase Method, assets and liabilities are recorded at fair market values, while under Pooling, book values are used.
c) Record Discharge of Purchase Consideration
Payment to the liquidator is recorded:
Liquidator of Transferor Co. A/c Dr.
To Equity Share Capital A/c / Bank A/c / Debenture A/c
This depends on the mode of consideration—cash, shares, or debentures.
d) Adjust Goodwill or Capital Reserve (Only for Purchase Method)
If purchase consideration is more than net assets:
Goodwill A/c Dr.
To Capital Reserve A/c
If net assets exceed the consideration:
Capital Reserve A/c Dr.
To Goodwill A/c
e) Transfer of Reserves (Only in Pooling of Interest Method)
The reserves of the transferor company are carried into the books of the transferee:
General Reserve A/c Dr.
Profit & Loss A/c Dr.
To Respective Reserve Accounts
Prepare Combined Trial Balance
After passing all necessary journal entries, prepare a combined trial balance that includes:
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Assets and liabilities of both companies
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Adjusted capital
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Reserves (only under Pooling)
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Goodwill or capital reserve
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Share capital after issuance (if applicable)
Preparation of Final Financial Statements:
Now, based on the final trial balance, the following financial statements are prepared:
a) Balance Sheet
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Must follow Schedule III of Companies Act, 2013
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Show consolidated values of assets, liabilities, and equity
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Disclose goodwill or capital reserve (if any)
b) Profit & Loss Account
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Combined revenue and expenses of both entities for the applicable period
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Ensure compliance with revenue recognition principles
c) Cash Flow Statement
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Reflects the cash movements resulting from the merger
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Non-cash transactions like share issue must be disclosed separately
Notes to Accounts & Disclosures:
As per accounting standards and Companies Act, the following must be disclosed:
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Nature and terms of the merger
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Method of accounting used
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Consideration details
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Goodwill or capital reserve
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Legal approvals and effective date
