AS 14:Accounting For Amalgamations

Introduction: 
The accounting terminology of „Amalgamation‟ is derived from the term „Amalgam‟ which means to unite. In corporate environments also two entities unite and form a single entity.
Important Terms

• Transferor Company: Company which is amalgamated into another company
• Transferee Company: Company into which Transferor Company would amalgam.

Types and Method of Accounting
In general, there are two types of amalgamation and method of accounting, they are:

      Nature of Amalgamation                                       Method of Accounting

1. Merger                                                                  Pooling of Interest method
2. Purchase                                                               Purchase method

Amalgamation in nature of merger

1. In the event of two entities coming together. If all five conditions stated in AS 14 are fulfilled it is treated as amalgamation in nature of merger. The conditions are as follows:
2. All the assets and liabilities of the transferor company become the assets and liabilities of the transferee company.
3. Shareholders of the transferor company holding not less than 90% of the face value of equity shares become the shareholders of transferee company by virtue of amalgamation.
4. Consideration made to equity shareholders of transferor company is in the form of equity shares in the transferee company, except in case of fractional shares cash can be paid.
5. The business of the transferor company is intended to be carried on by the transferee company even after amalgamation.
6. Assets and liabilities of the transferor company are incorporated in the books of the transferee company at book value except to ensure uniform accounting policies.

Pooling of Interest method

1. In preparing financial statements of the transferee company, assets, liabilities and reserves of the transferor company should be recorded as existing carrying amounts and in the same form at the date of amalgamation, balance of the profit and loss account of the transferor company should be aggregated with the corresponding balance of the transferee company or transferred to general reserve if any.
2. If at the time of amalgamation the accounting policies followed by the transferor company and transferee company are in conflict, it should be resolved, and brought in line with the policies of the transferee company.
3. The difference between the amount recorded in share capital issued and the amount of share capital issued by the transferor company should be adjusted in reserves, however in some cases courts may stipulate the manner in which the reserves should be adjusted.

Amalgamation in nature of purchase

What is not a merger is a purchase.

Purchase method

In purchase method accounting for amalgamation is done by applying same principles used in accounting for normal purchase of assets. Some of the rules adopted are the following.

1. The Assets and liabilities (not reserves) of the transferor company are incorporated in the books of transferee company at the existing amounts. Alternatively, the purchase consideration should be allocated individual identified Assets and liabilities on the basis of their fair values at the date of amalgamation.
2. Non statutory reserves of the transferor company are not included in the financial statements of the transferee company.
3. If purchase consideration > net assets, the difference is debited to the good will account. If purchase consideration < net assets, the difference is credited to the capital reserve account.
4. The goodwill arising on amalgamation should be amortized to income over the five useful life. however if some what a longer period is justifiable the period of amortization can be extended.
5. Where the requirements of the relevant statute so demands, statutory reserves should be recorded in the financial statement of the transferee company.(credit statutory reserves, debit „Amalgamation adjustment account‟). When legal requirements no longer warrants maintenance of such reserve a reverse entry is passed. The Amalgamation adjustment account should be disclosed in the bal-ance sheet under the heading „Miscellaneous Expenditure‟.

Areas Having Linkage

Non cash consideration

If consideration paid to transferor company, include securities or non cash items. Four aspects have to be kept in mind.

• Non cash component must be valued at fair value.
• In case of securities, the value fixed by the statutory authorities have to be taken as fair value.
• If other Assets are handed over their market value is taken as fair value.
• If market value are not ascertainable then the net book values are taken as fair value.

Adjustment of consideration – Future events

A purchase or merger transaction can take place on terms and conditions which may include an element of consideration payable on a subsequent date which may depend on one or more events materializing, two possibilities may arise.

• Such a condition payment if probable and amount can also be estimated then the amount should be included in the consideration.
• In all other cases, it must be recognized as soon as the amount is determinable.

Treatment of reserves if specified in the scheme of amalgamation

In some cases, the court may specify certain conditions pertaining to „treatment of reserves‟ of transferor company, then such conditions should be followed. If such conditions as laid down by the court is different from those of AS 14, then the following additional disclosures is to be made.

• Description of accounting treatment given.
• Reasons for following such treatment.
• Deviations in accounting treatment given to reserves sanctioned under the statue as compared to AS 14 that would have been followed, had no treatment been prescribed by the court.

Disclosure Requirements
1. For all amalgamations

• Names, nature of business of amalgamating companies and Effective date of amalgamation.
• Method of accounting
• Particulars of scheme –statutorily sanctioned
• Amalgamation after B/S date but before issue of financial statements disclose as per AS 4 – but not be incorporated in financial statements.

2. For Pooling of interest -1st Financial Statement

• Description and nature of shares issued.
• Percentage of equity shares exchanged to give effect to amalgamation.
• Difference between consideration and NAV treatment.

3. For Purchase method-1st Financial Statement

• Consideration paid and contingently payable.
• Difference between consideration and NAV treatment.
• Amortization period of goodwill if any.