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Amalgamation of Companies

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  AMALGAMATION OF COMPANIES Amalgamation means combination or merger. In amalgamation two or more organizations combine their resources to take advantage of large scale production, avoiding competition, expansion and so on. In practice the combination or merger can take place in any one of these ways namely- (i)   Amalgamation (ii)   Absorption AMALGAMATION- In Amalgamation, a new company is formed to purchase or take over the business of two or more existing companies. In such cases all the existing companies are liquidated or wound up and they lose their identities and are known by the name of the new company. It is called Pure Amalgamation . Thus, there is formation of one company and liquidation of at least two companies. Example- K. Ltd. And P. Ltd., both existing companies, are liquidated or wound up and a new company R. Ltd. Is formed to purchase K. Ltd. And P. Ltd. It is a case of amalgamation or Pure amalgamation. The company going into liquidation is called the Vendor Company or Transferor Company.  The newly formed company or the company which takes over is called the Purchasing Company or Transferee Company. ABSORPTION- In Absorption, an existing company takes over the business of another existing company or other existing companies. There is no formation of a new company though there is liquidation or wounding up of one or more than one companies. Example- If A. Ltd., an existing company, takes over the business of S. Ltd., it is a case of Absorption. S. Ltd. Would be wound up. Therefore. A. Ltd. Would be known as the Purchasing (Transferee) Company and S. Ltd. Will be known as the Vendor (Transferor) Companies. AMALGAMATION OF COMPANIES (AS 14)- ICAI has issued AS-14, Accounting for Amalgamations. According to this, there are two types of amalgamations- (i)   Amalgamation in the nature of Merger (ii)   Amalgamation in the nature of Purchase AMALGAMATION IN THE NATURE OF MERGER OR POOLING OF INTERESTS METHOD- An amalgamation is in the nature of merger if the following conditions are satisfied- (i)   All the assets and liabilities of the transferor company become the assets and liabilities of the transferee company. In the other words, all assets and liabilities of the vendor company are taken over by the purchasing company. (ii)   Shareholders holding at least 90% or more of the face value of the equity shares of the vendor company become the equity shareholders of the purchasing company.  (iii)   The Purchase Consideration due to the equity shareholders of the vendor company is discharged by the purchasing company wholly by the issue of equity shares in the purchasing company and cash paid in respect of fractional shares. (iv)   The business of the vendor company is intended to be carried on by the purchasing company after amalgamation. (v)   No adjustment is intended to be made in the book values of assets and liabilities of the vendor company when they are taken over by the purchasing company. AMALGAMATION IN THE NATURE OF PURCHASE- Amalgamation is in the nature of purchase, if any of the conditions applicable to amalgamation in the nature of merger is not satisfied. MEANING OF PURCHASE CONSIDERATION- Purchase Consideration means the price payable by the transferee company to the transferor company for taking over the business of transferor company. The aggregate of the shares and other securities issued and payment made in the form of cash or other assets by the transferee company to the shareholders of the transferor company is called Purchase Consideration. It does not include payments made to the creditors, debenture holders, outside liabilities or any other persons of the transferor company. CALCULATION OF DIFFERENT METHODS OF PURCHASE CONSIDERATION- (i)   Lump-sum payment method- Under this method, the amount of the purchase consideration to be paid by the transferee company to the transferor company is mentioned explicitly. No other calculations are required. Example- Y. Ltd. Takes over the business of Z. Ltd. For Rs. 50 Lakhs. Hence, the purchase consideration is the sum of Rs. 50 Lakhs and there is no need for any further calculation. (ii)   Net assets method- Under this method, purchase consideration is arrived at by adding the agreed (or market) values of the assets taken over by the transferee company and deducting therefrom the agreed values of the liabilities taken over by the transferee company. If the examination problem is silent about the agreed values, the book values of assets and liabilities given in the balance sheet of the transferor company are considered as agreed values. (iii)   Total payments method or Net payments method- Under this method, the purchase consideration is calculated by adding up the total amount (money value) of equity shares, preference shares and cash received from the purchasing company for the shareholders of the vendor company. Thus, it includes the following- (a)   Amount of Preference shares i.e., number of shares X Issue price (b)   Cash for Preference shareholders (c)   Amount of Equity shares i.e., number of shares X Issue price (d)   Cash for Equity shareholders  (iv)   Exchange method or Swap ratio method- Sometimes the purchasing company takes over the business of the vendor company on the basis of ratio in which the shares of the purchasing company are to be exchanged for the shares of the vendor company. POOLING OF INTERESTS METHOD- Under this method, there is complete merger or pooling of assets, liabilities, capital, reserves, surplus and businesses of both the companies. (i)   The assets, liabilities and all types reserves of the vendor company are recorded by the purchasing company at their existing book values at the date of amalgamation. (ii)   The surplus of the vendor company is taken over by the purchasing company. (iii)   If amount of purchase consideration is less than the share capital taken over, the difference is treated as Capital Reserve. (iv)   If amount of purchase consideration is more than the share capital taken over, the difference is subtracted from the reserves (first from capital reserve, if any, then revenue reserve like general reserve, if any, then surplus at the end). PURCHASE METHOD- (i)   The reserves of the vendor company such as general reserve, capital reserve, revaluation reserve, etc. including surplus are not incorporated in the books of the purchasing company. (ii)   A particular type of reserve created under any law is known as Statutory Reserve. Example- Export Profit Reserve, Development Rebate Reserve, Investment Allowance Reserve, Project Export Reserve, Tea Development Reserve, Foreign Project Reserve, etc. created by the vendor company are only taken over by the purchasing company for legal compliances. Such reserves are shown under the Liabilities side of balance sheet along with other reserves. Also, these are shown under the Assets side of the balance sheet as Non-Current Assets. (iii)   If the amount of purchase consideration is more than the value of net assets (total assets-outside liabilities) acquired by the purchasing company, the difference is shown as Goodwill. (iv)   If the amount of purchase consideration is less than the value of net assets acquired by the purchasing company, the difference is shown as Capital Reserve. ****************

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