Accounting for Amalgamations - Webs...Courts-Amalgamation includes absorption also. For Accounting...
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Accounting for Amalgamations For CA FINAL
Transcript of Accounting for Amalgamations - Webs...Courts-Amalgamation includes absorption also. For Accounting...
Accounting for Amalgamations
For CA FINAL
What is “Amalgamation”?
Amalgam
To unite, to come together as one, to blend
AmalgamationAmalgamation
Dissolution of one or more business entities and
transfer of business of dissolved entities to
another entity
Why “Amalgamation”?
Increase
Large Scale
OperationsEliminate duplicate
facilities, processes
etc.To acquire
cash Increase
Shareholders Value
Tax Savings
etc.
Eliminate
Competition
cash
resources
AS-14 “Accounting for Amalgamations
AS-14 defines Amalgamation
Amalgamation means an amalgamation pursuant to
the provisions of the Companies Act,1956 or any
other statute which may be applicable to companies.other statute which may be applicable to companies.
Companies Act, 1956 – Does not define amalgamation
Courts- Amalgamation includes absorption also.
For Accounting Purposes
Amalgamation
Amalgamation in the
Nature of MergerAmalgamation in the
Nature of PurchaseNature of Merger Nature of Purchase
Amalgamation in the Nature of Merger
1. All the assets and liabilities of the transferorcompany become after the amalgamation theassets and liabilities of the transferee company
2. Shareholders holding not less than 90% of theface value of the equity shares of the transferorcompany becomes the equity shareholders ofthe transferee company by virtue of thethe transferee company by virtue of theamalgamation
For the purpose of computing 90% exclude theShares already held prior to amalgamation by:a) Transferee company in the transferor company
b) one or more subsidiaries of the transferee companyin the transferor company
c) Nominees of the transferee company in thetransferor company.
3. The consideration for the amalgamation receivable bythose equity shareholders of the transferor companywho agree to become shareholders of the transfereecompany is discharged by the transferee companywholly by the issue of equity shares in the transfereecompany, except that the cash may be paid in respectof fractional shares.
Amalgamation in the Nature of Merger
4. The business of the transferor company is intended tobe carried on, after the amalgamation, by thetransferee company.
5. No adjustments is intended to be made to the bookvalues of the assets and liabilities of the transferorcompany when they are incorporated in the financialstatements of the transferee company except toensure uniformity of accounting policies.
Amalgamation in the nature of Purchase
AS-14
“An amalgamation should be considered
to be an amalgamation in the nature of
purchase, when any one or more of thepurchase, when any one or more of the
conditions specified in paragraph 29 is not
satisfied.”
Transactions & Events in Amalgamation
• Determination of Purchase Consideration
(PC)
• Accounting in the books of the transferor
companycompany
• Accounting in the books of the transferee
company.
Determination of PC
Consideration for the amalgamation
means the aggregate of the shares and
other securities issued and the payment
made in the form of cash or other assetsmade in the form of cash or other assets
by the transferee company to the
shareholders of the transferor company.
PC = Shares + Other Securities + Cash or
other assets
Computation of PC
Computation
Net Assets Method Payments Method
Aggregate of Aggregate of assets taken
over at fair value XXXX
Less: Liabilities taken over
At an agreed amount XXXX
XXXX
Aggregate of
consideration
paid to
shareholders
In the books of Transferor Company
(Transactions & Events)
1. Assets & Liabilities transferred
2. Settlement of assets & liabilities not
taken over by transferee company.
3. Purchase consideration due3. Purchase consideration due
4. Purchase consideration received
5. Realisation expenses
6. Amount due to shareholders
7. Settlement of shareholders due
Accounting in the books of transferor
company
Assets & Liabilities transferred
Realisation A/c Dr. (BV)
To Assets A/c (BV)
Liabilities A/c Dr. (BV)
To Realisation A/c (BV)
Settlement of Assets & Liabilities not taken
over
Bank A/c Dr.
Realisation A/c Dr. (assuming Loss)
Accounting in the books of
transferor company
Realisation A/c Dr. (assuming Loss)
To Assets A/c
Liabilities A/c Dr.
To Bank A/c
To Realisation A/c (Discount if any)
PC Due
Transferee Company A/c Dr.
To Realisation A/c
PC Received
Accounting in the books of transferor
company
PC Received
Shares/Sec. in transferee co A/c Dr.
Bank A/c Dr.
To Transferee Co. A/c
Realisation Expenses
Accounting in the books of transferor
company
Incurred by
Transferee Co.
Incurred by
Transferor Co.
Incurred by Transferor Co &
Transferee Co.
No Entry
Transferor Co.
Realisation A/c Dr.
To Bank A/c
Reimbursed by Transferee Co.
1. Transferee Co. A/c Dr.
To Bank A/c
2. Bank A/c Dr.
To Transferee A/c
Amount due to Shareholders
Share Capital A/c Dr.
Reserve & Surplus A/c Dr.
To Shareholders A/c
Accounting in the books of transferor
company
To Shareholders A/c
Settlement with the shareholders
Shareholders A/c Dr.To Shares/ Securities in Transferee Co. A/c
To Bank A/c
Accounting in the books of Transferee Co.
Method of Accounting
Amalgamation in the Amalgamation in the
Nature of MergerAmalgamation in the
Nature of Purchase
Pooling of
Interest Method
Purchase Method
Amalgamation in the nature of Purchase
Purchase Method:
� Incorporate Assets & Liabilities at their existing
carrying amount or alternatively the
consideration should be allocated to individual
assets & liabilities on the basis of their fair value.
� The reserves other than statutory reserves
should not be incorporated in the books of
transferee company.
� If PC > Net Assets acquired, recognise excess
as Goodwill & If PC< Net Assets then difference
is recognised as Capital Reserve.
Purchase Method
� Goodwill arising on the amalgamation shouldbe amortised to income on the basis of its usefullife. Amortisation period should not exceed fiveyears unless longer period is justified.
Amalgamation in the nature of Purchase
years unless longer period is justified.
� If Statutory Reserves are required to bemaintained, they are maintained by passing thefollowing entry:
Amalgamation Adjustment A/c Dr.
Statutory Reserves A/c.
Transaction/Events of Transferee Co.
1. PC Due
2. Incorporation of Assets & Liabilities
3. Discharge of PC
4. Realisation Expenses4. Realisation Expenses
5. Inter company Owings
6. Maintenance of Statutory Reserves
Accounting entries in the books of
Transferee Co.
1. PC Due
Business Purchase A/c Dr.
To Liquidator of Transferor Co.
2. Incorporation of Assets & Liabilities2. Incorporation of Assets & Liabilities
Assets A/c Dr.
Goodwill A/c Dr. (Bal fig.)
To Liabilities A/c
To Business Purchase A/c
To Capital Reserve (Bal fig.)
3. Discharge of PC
Liquidator of Transferor Co. A/c Dr.
To Share Capital A/c
To Securities Premium A/c
Accounting entries in the books of
Transferee Co.
To Securities Premium A/c
To Bank A/c
Realisation Expenses
Accounting entries in the books of
Transferee Co.
Incurred by
Transferor Co.Incurred by
Transferee Co.
Incurred by Transferor Co &
Reimbursed by Transferee Co.
No Entry
1. Goodwill /Capital Reserve A/c Dr.
To Bank A/c
Inter Company Owings
Eliminate the effect of transactions
e.g. Creditors A/c Dr.
Accounting entries in the books of
Transferee Co.
e.g. Creditors A/c Dr.
To Debtors A/c
Statutory Reserves
Amalgamation Adjustment A/c Dr.
To Statutory Reserves A/c
Solution to CD Ltd.
Calculation of PC
Particulars Creative Ltd. LG Ltd.
Freehold prop. 18000
Plant & Furnit. 12462 4864
Stocks 4628 5562Stocks 4628 5562
Debtors 13750 3664
Less: Creditors (16182) (18260)
Less: Unrec. Liabi. (240)
Net Assets 14418 13830
Discharge of PC
Creative Ltd. LG Ltd.
Total PC 14418 13830
Share Capital
Solution to CD Ltd.
Share Capital
Issued (16000) (15000)
Cash Recd by
CD Ltd. 1582 1170
Inter Company Holdings
Inter Company Holdings
Purchasing
Co. Holding
Selling Co.
Holding Shares Cross Holdings
Co. Holding
shares in
Selling Co.
Holding Shares
in Purchasing
Co.
Cross Holdings
Purchasing Co. Holding shares in
Selling Co.
Impact on PC calculation:
Total PC (Normal Calculation) XXXX
Less: Share of Purchasing Co.
in the total PC XXXXin the total PC XXXX
PC to Outsiders XXXX
Accounting Effect
Accounting Effect
On Selling Co. On Purchasing Co.
Cancel the Capital held by
Purchasing Co. (as no PC Recd for
that Capital)
Equity Share Capital A/cDr.
To Realisation A/c
Cancel the investment in
Selling Co at book value in
take over entry
Solution to O Ltd.Calculation of PC
O Ltd. P Ltd.
Fixed Assets 110 50
Investments 3018.75
Current Assets 40.25 3.25
(-) 12% Debentures 11 5.5
Creditors 8 2.75
Net Assets 75
I V Per Share 15
150
60
Calculation of PC
Total PC (15 x 500000) = 7500000
Less: Share of O Ltd. = 1875000
PC to Outsiders = 5625000
Solution to O Ltd.
PC to Outsiders = 5625000
Selling Co. Holding in shares of
Purchasing Co.
Impact on PC Calculation
1. Calculate Total PC (Normal calculation)
2. Find out the break up of PC
3. Find out no. of shares already held by selling co. & then calculate net shares to be issued:
3. Find out no. of shares already held by selling co. & then calculate net shares to be issued:
Total shares as calculated in (2) XXX
(-) Number of shares already held (XXX)
Net Shares to be issued XXX
Accounting Impact
Accounting Effect
On Purchasing Co.On Selling Co. On Purchasing Co.
1. Liquidator holding shares in
purchasing co @ its cost.
2. Liquidator will receive shares in
Purchasing Co as part of the PC @ IP
of purchasing Co.
3. Revalue the old shares by taking
effect to Realisation A/c.
No Special Entry
Cross Holding
Impact on PC
Net Asset Method Payment MethodNet Asset Method Payment Method
1. Compute the Net Assets of Selling
Co.
2. Determine the net assets
pertaining to Outsiders
3. Determine the mode of discharge
4. Deduct the number of shares
already held by Selling Co.
1. Determine the PC to Outsiders
2. Deduct the number of shares
already held by Selling Co.
Solution to Medium Ltd.
Calculation of PC
Holding of Big Ltd. in Small Ltd.
10000/50000 x 100 = 20%
Holding of Small Ltd. in Big Ltd.
5000/40000 x 100 = 12.5%
Big Ltd. Small Ltd.
Goodwill 150000 250000
Other Sundry Assets 5350000 1300000
Investments 1/5 of S 1/8 of B
Solution to Medium Ltd.
Investments 1/5th of S 1/8th of B
(-) Creditors (1250000) (1250000)
Net Assets B S
4250000 + 1/5th of S = B ------------- I
300000 + 1/8th of B = S-------------- II
4250000 + 1/5 (300000+1/8 of B) = B
Solution to Medium Ltd.
4250000 + 1/5th (300000+1/8th of B) = B
4310000 + 0.025 = B
B= 4310000/.975= 4420512
S= 852564
Big Ltd. Small Ltd.
Total Net Assets 4420512 852564
(-) Internal Invest (552565) (170500)
Net PC 3867947 682064
Solution to Medium Ltd.
Net PC 3867947 682064
