Unit IV Amalgamation Of Companies For Corporate Accounting Bcom Sem 4 Delhi university Notes

Unit IV Amalgamation Of Companies For Corporate Accounting Bcom Sem 4 Delhi university :  Amalgamation is defined as a simple arrangement or reconstruction of business. It is a process that involves combining of two or more companies as either absorption or as blend. Two or more companies can either be absorbed by an entirely new firm or a subsidiary powered by one of the basic firm. In such cases all the shareholders of the absorbed company automatically become the shareholders of the ruling company as the amalgamating company loses its existence. All the assets and liabilities are also transferred to the new entity.

Amalgamation has given different forms to different actions in due course of the merger taking place. It can either be classified in the nature of merger or in the nature of purchase. If the process takes place in the nature of merger then the all assets, liabilities, and shareholders holding not less than 90% of equity shares are automatically transferred to the new company or the holding company by virtue of the amalgamation.

Unit IV Amalgamation Of Companies For Corporate Accounting Bcom Sem 4 Delhi university :  When amalgamation takes place in nature of purchase then the assets and liabilities of the company are taken over by the ruling company. All the properties and characteristics of amalgamating company should vest with the other company. Even the shareholders holding shares not less than 75% should transfer their shares to the transferee company. In such a case any company does not purchase the business resulting in a takeover, the transferor company does not completely lose its existence.

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Unit IV Amalgamation Of Companies For Corporate Accounting Bcom Sem 4 Delhi university Notes

Unit IV Amalgamation Of Companies For Corporate Accounting Bcom Sem 4 Delhi university :  Read this article to learn about the accounting treatment required during amalgamation of companies!

Accounting for amalgamation of companies involves:

I. Computation of purchase consideration

II. Accounting Treatment in books of Transferor Company.

III. Accounting Treatment in books of Transferee Company according to the type of amalgama­tion.

I. Purchase Consideration:

Unit IV Amalgamation Of Companies For Corporate Accounting Bcom Sem 4 Delhi university :  Purchase consideration means the price payable by Transferee Company to the Transferor Company for acquiring its business. According to AS-14, “Consideration for amalgamation means the aggregate of the shares and other securities issued and the payment made in the form of cash or other assets by Transferee Company to the shareholders of the transferor company.”

This definition emphasizes the following points which should be remembered while calculating ‘Purchase Consideration’:

1. Only payments to shareholders are to be taken into consideration.

2. Considerations for debenture holders and liquidation expenses or cost absorption are not included in the Purchase Consideration.

Method of Calculating Purchase Consideration:

There are two methods of calculating the purchase consideration:

1. Net Payment Method

2. Net Assets Method

The choice of method depends on availability of information. If information is available on all modes of discharging the purchase consideration (e.g. preference shares, equity shares or cash payable to shareholders of Transferor Company) along-with their amounts, then Net Payment Method should be used. In other cases ‘Net Assets’ Method should be used.

Net Payment Method:

‘Purchase Consideration’ under this method is taken as the aggregate of all payments made in the form of shares, debentures, other securities and cash to the shareholders of the transferor company.

Illustration 1:

X Ltd. agrees to acquire the business of Y Ltd. on the following terms:

1. The shareholders of Y Ltd. are to be paid Rs. 25 in cash and are offered four shares of Rs. 10 each in X Ltd. for every share in Y Ltd. Y Ltd. has 50,000 equity shares outstanding as on the date of amalgamation.

2. The debenture holders holding 5,000 debentures of Rs. 100 each are to be redeemed at a premium of 10%.

3. Cost of liquidation amounting to Rs. 25,000 are to borne by X Ltd.

Calculate the value of purchase consideration.

Solution:

Amount payable to Shareholders of Y Ltd. Rs

1. Cash payment (Rs. 25 x 50,000) 12, 50,000

2. Shares Issued (50,000 x 4 x 10) 20, 00,000

Total purchase consideration 32, 50,000

Illustration 2:

A Ltd. agrees to absorb B Ltd., the consideration being:

1. The assumption of trade liabilities of Rs. 50,000.

2. The payment of the costs of liquidation Rs. 2,000.

3. The redemption of 80% debentures of Rs. 6, 00,000 at a premium of 10%.

4. The payment of Rs. 20 p.a. share in cash and the exchange of two fully paid Rs. 10 shares in A Ltd. for every share of Rs. 25 in B Ltd. The share capital of the vendor company consists of 20,000 shares of Rs. 25 each fully paid.

Calculate the purchase consideration as per AS-14.

Solution:

Amount payable to shareholders of B Ltd. Rs.

1. Cash Rs. 10 x 20,000 shares 2, 00,000

2. Equity Shares of A Ltd. (2 x 10 x 20,000) 4, 00,000

Total 6, 00,000

Note:

According to AS-14, the amount paid by transferee company to discharge the debenture holders and the liquidation expenses of the vendor (transferor) company are not considered as part of purchase consideration.

Illustration 3:

X Ltd. is acquired by Y Ltd., the consideration being the takeover of liabilities; the payment of cost of acquisition as a part of purchase consideration not exceeding Rs. 20,000 (actual cost Rs. 17,000); the payment of the debentures Rs. 1,00,000 at a premium of 10% in 9% debentures issued at par; and the payment of Rs. 16 per share in cash and allotment of one 145 preference share of Rs. 10 each and 6 equity shares of Rs. 10 each fully paid for every 4 shares in X Ltd. The number of shares of the vendor company (X Ltd.) is 2, 00,000 of Rs. 10 each fully paid. Calculate purchase consideration as per AS-14.

Solution:

Payment to Equity Shareholders Rs.

1. Cash Rs. 16 x 2, 00,000 = 32, 00,000

2. 14% Preference Shares—2, 00,000/4 x Rs. 10 = 5, 00,000

3. Equity Shares 2, 00,000/4 x 6 x Rs. 10 = 30, 00,000

Total = 67, 00,000

Net Assets Method:

Net Assets Method is used when all the modes of discharging the purchase consideration (e.g. Pref. Shares, Equity shares or cash payable to shareholders of transferor company) are not given and hence where Net Payment Method cannot be adopted. Under this Method, purchase consideration is ascertained by aggregating the agreed values of only those assets which have been taken over by the transferee company and deducting it from the agreed value of liabilities taken over.

Illustration 4:

The Balance Sheet of Digvijay Ltd. on 31st March, 2013 was as under:

Sumant Ltd. absorbs Digvijay Ltd. on the following terms:

1. Sumant Ltd. to take over sundry creditors.

2. It will also take over land and buildings, Plant and Machinery and investments at 120% of book values, sundry debtors at 90% of book values and goodwill at Rs. 70,800.

3. Liability to debentures including interest to be met by issue of Rs. 5,00,000, 15% debentures by Sumant Ltd.

Calculate purchase consideration.

II. Accounting Treatment in the Books of Transferor/Vendor Company:

Unit IV Amalgamation Of Companies For Corporate Accounting Bcom Sem 4 Delhi university :   So far as the books of the transferor company are concerned, the normal procedures are to be followed for closing the books of account through Realisation Account. It should be noted that the Accounting Standard (AS-14) deals with the accounting procedures only in the books of the transferee company.

In case of amalgamation the transferor company has to wind up its business and hence it will dispose off its assets, pay its liabilities and distribute the surplus if any among its shareholders. It is done through opening a new account known as Realisation Account. In order to close the books of account of the transferor company, the following steps (along with their journal entries) are required:

Step 1:

Open a Realisation Account, transfer all assets and liabilities (excluding fictitious assets) to this account.

Journal Entry:

For transferring different assets to Realisation Account.

1. Realisation A/c Dr. (with total)

  To Sundry assets (individually) (with their individual values)

Points to be noted:

(a) Fictitious assets, such as preliminary expenses, discount on issue of shares and debentures, debit balance of Profit and Loss Account etc. are not transferred to Realisation Account.

(b) In tangible assets such as goodwill, patents, trademarks etc. are also transferred to Realisation Account.

(c) The cash and bank balances should not be transferred to Realisation Account if these are not taken over by the purchasing company.

(d) An asset against which a provision or reserve has been created should be transferred at its gross figure and not at its net figure e.g. debtors.

Step 2:

For transferring different liabilities to Realisation Account.

Sundry Liabilities Dr. [with their individual book values]

  To Realisation A/c [with the total]

Points to be noted:

(i) Items in the nature ‘Provisions’ (e.g. Provision for taxation, Employees provident fund, Pension Fund, Provision for doubtful debts, Provision for Depreciation) should be transferred to Realisation Account.

(ii) Items in the nature of ‘Reserve’ are not to be transferred to Realisation Account. These are directly transferred to sundry shareholders account (e.g. workmen compensation fund, credit balance of profit and loss account).

(iii) A liability against which a provision or reserve has been created should be transferred at its gross figure e.g. creditors.

Step 3:

For realising assets which have not been taken over by the purchasing company.

Cash or Bank Account Dr. (with the amount realised)

  To Realisation account

Step 4:

For discharging liabilities, which have not been taken over by the purchasing company.

Realisation A/c Dr. (with the amount paid)

  To Cash

Step 5:

To record liquidation expenses

Step 6:

For Receiving Purchase Consideration

Step 7:

Discharge the claims of preference shareholders and transfer the difference between the amount actually payable and the book figure to Realisation Account

Journal Entries for making the payment due:

Step 8:

Ascertain the profit/loss on realisation and transfer the same to equity shareholders account

Step 9:

Transfer Equity share capital, Accumulated profits and Reserves shown in the Balance Sheet (just before date of amalgamation) to Equity Shareholders Account

Step 10:

Transfer Accumulated losses (shown on debit side of Balance Sheet just before amalgamation)

Step 11:

Make the final payment to equity shareholders

Notes:

1. After passing the above mentioned entries in books of Transferor Company, all the accounts will be closed and not a single account will show any balance.

2. The net amount payable to equity shareholders must be equal to the amount of shares in Transferee Company and cash and bank balance left after the discharge of all outsiders’ liabilities and claims of preference shareholders.

III. Accounting Treatment in Books of Transferee Company or Purchasing Company:

Accounting treatment in books of Transferee Company depends upon the type of amalgamation.

As per AS-14, there are two methods of accounting for amalgamation:

1. Pooling of Interest Method:

Applicable in case of Amalgamation in the nature of merger.

2. Purchase Method:

Applicable in case of Amalgamation in the nature of Purchase.

Pooling of Interest Method (as per AS-14):

The following are the salient features of pooling of interest method:

1. All assets, liabilities and reserves of the transferor company are recorded by the transferee company at their existing carrying amounts (book values) except in cases where these are to be adjusted to follow uniform set of accounting policies.

2. The identity of the reserves is preserved as they appear in financial statements of the transferee company. For example, the general reserve of the transferor company becomes the general reserve of the transferee company, the capital reserve of the transferor company becomes the capital reserve of the transferee company and the revaluation reserve of the transferor company becomes the capital reserve of the transferee company.

3. No goodwill account should be accounted for as a result of amalgamation in the books of the transferee company.

4. The difference between the amount of share capital issued (plus any additional consideration in the form of cash or other assets) and the amount of share capital of Transferor Company should be adjusted in reserves in the financial statements of the transferee company.

5. The balance of profit and loss account appearing in the financial statements of the transferor company is aggregated with the corresponding balance appearing in the financial statements of the transferee company.

6. Although AS-14 does not specifically state, the purchase consideration under this method is to be valued at par value of shares issued. The logic is that this method considers book values and not the fair values.

Accounting Entries in books of the Transferee Company (Pooling of Interest Method):

Illustration 4:

The following are the Balance Sheets as on 31st December, 2013 of X Ltd. and Y Ltd.:

Unit IV Amalgamation Of Companies For Corporate Accounting Bcom Sem 4 Delhi university Notes

Unit IV Amalgamation Of Companies For Corporate Accounting Bcom Sem 4 Delhi university :

Unit IV Amalgamation Of Companies For Corporate Accounting Bcom Sem 4 Delhi university Notes

Unit IV Amalgamation Of Companies For Corporate Accounting Bcom Sem 4 Delhi university :  In January, 2014, the two companies agree to amalgamate and form a new company called Z Ltd. which takes over the assets and liabilities of both the companies. The authorized Capital of Z Ltd. is Rs. 10, 00,000, consisting of 1, 00,000 Equity Shares of Rs. 10 each.

The purchase consideration is agreed at Rs. 1, 20,000 and Rs. 60,000 for X Ltd. and Y Ltd. respectively. The entire purchase consideration is to be paid by Z Ltd. in its fully paid shares. In return for debentures in X Ltd. debentures of the same amount and denomination are to be issued by Z Ltd.

Give Journal Entries to close the books of X Ltd. and Y Ltd. and show the Opening entries in the books of Z Ltd. Also prepare the opening Balance Sheet of Z Ltd.

Illustration 5:

Zuari Ltd. agrees to absorb the business of Agro India Ltd. and to take over the Assets and Liabilities at their Balance Sheet value, in exchange for which it is to issue 12 shares of Rs. 10 each for every share of Rs. 100 in the Agro India Ltd. The expenses of absorption Rs. 10,000 will be paid by Zuari Ltd.

On the date of absorption i.e., 31st March, 2014, the Balance Sheets of the two companies were as under:

Show the Journal Entries in the books of the Zuari Ltd. and Agro India Ltd. Also prepare opening Balance Sheet of Zuari Ltd. immediately after absorption.

Solution:

1. Purchase Consideration:

5,000 x 12 = 60,000 shares x Rs. 10 = Rs. 6, 00,000

2. Entries in books of Agro India Ltd. (Transferer Co.)

Note:

The contents of paragraph 35 of the standard (AS-14) are given effect to in the case of pooling of interest method applicable to an amalgamation in the nature of a merger as under:

Since liquidation expenses of Rs. 10,000 paid by the transferee company are to be charged to Profit and Loss Account, the same are set-off against the balance of reserve in the absence of Profit and Loss Account.

Unit IV Amalgamation Of Companies For Corporate Accounting Bcom Sem 4 Delhi university Notes

Unit IV Amalgamation Of Companies For Corporate Accounting Bcom Sem 4 Delhi university : Purchase Method: The purchase method is applied in case of amalgamation in the nature of purchase.

The salient features of this method are as follows:

1. Recording of assets and liabilities:

The assets and liabilities of the transferor company should be incorporated at their existing carrying values or, alternatively, at their fair values (revised values) on date of amalgamation.

2. Recording of reserves:

(i) Statutory Reserves:

Unit IV Amalgamation Of Companies For Corporate Accounting Bcom Sem 4 Delhi university : Are those reserves which are required to be maintained as per the legal provisions, and there is restriction on its usage. If a statutory reserve is appearing in the Balance Sheet of a transferor company, the same should appear in the Financial Statements of the transferee company.

For this purpose ‘Amalgamation Adjustment Account’ is debited and ‘Statutory Reserve Account’ is credited. Amalgamation Adjustment Account is shown on the assets side as a part of “Miscellaneous Expenditure” or other similar category in the Balance Sheet.

When identity of the statutory reserves is no longer required to be maintained, both the reserves and the aforesaid account should be reversed. Examples of Statutory Reserves are: Investment allowance reserve; development rebate reserve, export profit reserve etc.).

(ii) Reserves other than statutory reserves:

Unit IV Amalgamation Of Companies For Corporate Accounting Bcom Sem 4 Delhi university : The reserves (whether capital or revenue or arising on revaluation) of the transferor company, other than the statutory reserves, should not be included in the financial statements of the transferee company.

3. Purchase Consideration:

Any excess of purchase consideration over net assets of the transferor company should be recognized as goodwill in the financial statements of Transferee Company. If the amount of consideration is lower than the value of net assets acquired, the difference should be treated as Capital Reserve.

4. Goodwill arising on amalgamation should be authorized systematically over its useful life. The authorization period should not exceed 5 years unless a somewhat longer period is justified.

Accounting Treatment in the Books of Transferee Company:

 Unit IV Amalgamation Of Companies For Corporate Accounting Bcom Sem 4 Delhi university Notes