ACCOUNTING FOR AMALGAMATION AS PER ACCOUNTING STANDARD 14

August 13, 2015

ACCOUNTING FOR AMALGAMATION

Amalgamation means the liquidation of one or more companies and transfer of business of liquidated

entities to another entity. There may be amalgamation either transfer of two or more undertakings to an

existing company or new company.

Scope

Accounting Standard 14 “accounting for amalgamations” issued by ICAI, is applicable for Transferee

Company (Buying Company). Let us understand some basic terms

Transferor Company: A company which is amalgamated into another company. The company selling its

business is known as “Transferor Company”  

Transferee Company: A company into which a transferor company is amalgamated. The company buying

other company is known as “Transferee Company”

Purchase Consideration: The consideration paid by the transferee company for the purpose of

amalgamation. Purchase consideration may be in the form of Equity shares, preference shares, Debentures,

Cash etc. There is no limit for fixing the price of Transferor Company it can be at discount, it can be at Par

or premium. Usually intrinsic value of shares is taken into consideration for computing the purchase

consideration.

Types of Amalgamation: 

As per Accounting standard 14 issued by ICAI there are two broad categories for accounting of

amalgamation.

 Amalgamation in nature of merger

 Amalgamation in nature of purchase

     

Amalgamation in nature of merger:

There are five specific conditions to satisfy that amalgamation is in nature of merger and the five conditions

have to be satisfied. Even if one condition is not satisfied then the nature of amalgamation is treated as

purchase.

The conditions are as follows

1. All the assets and liabilities of the transferor company (Selling Company) become the assets and

liabilities of the transferee company (Purchasing Company) after amalgamation.

2. Shareholders of selling company holding not less than 90% of the face value of equity

shares become the shareholders of purchasing company by virtue of amalgamation.   

3. The Consideration paid to equity shareholders of the selling company is in the form of Equity

shares.(Except in case of fractional shares the consideration is paid in cash)

4. The Business of the selling company is intended to be carried on by the purchasing company

after amalgamation.

5. Assets and liabilities of selling company were taken at book value (no changes has to be made to

book values of selling company.

Note: If the nature of amalgamation is merger then the method of accounting ispooling of Interest

Amalgamation in nature of Purchase:

If any one or more conditions pertaining to merger listed in the above are not satisfied then in that case the

nature of amalgamation is treated as purchase. Even if one condition of merger is not satisfied, it amounts

to purchase.

Note: If the nature of amalgamation is Purchase then the method of accounting isPurchase method

Method of Accounting
 Nature of Amalgamation Method of Accounting
Merger Pooling of Interest Method
Purchase Purchase Method

Pooling of Interest Method

Under this method the assets, liabilities and all reserves of the selling company are recorded by purchasing

company at their existing book value.(The amount can be adjusted to follow uniform set of accounting

policies)

The reserves of the selling company are also to be recorded subject to adjustments given below.

The difference between purchase consideration and paid up capital of selling company is to be adjusted as

follow:

Excess of consideration paid over paid up share capital (equity and preference) is to be adjusted against:

1. Free reserves of selling company

2. Secondly against free reserves of purchasing company

3. Lastly, debit profit and loss A/C.

Where the consideration paid is less than paid up capital, the difference is to be credited to capital reserves

of purchasing company after amalgamation.

Let us take small illustration in various scenarios:

                         

     Balance sheet of selling company

Liabilities Amount Assets Amount

Share capital 500000 Fixed assets 1250000
Reserves 500000 Current assets 250000
Current Liabilities 500000
Total 150000 Total 1500000
 0
          Note: Nature of amalgamation is merger     

          Consideration paid by selling company

Case I Case Case Case

II III IV
5,00,0 9,00,0 11,00,0 4,00,0
00 00 00 00

          Treatment of Reserves as per pooling of interest method

Sl.n Particular I II III IV

o
1 Purchase 5,00,0 9,00,0 11,00,0 4,00,0
Considerati 00 00 00 00
on
2 Paid up 5,00,0 5,00,0 5,00,00 5,00,0
share 00 00 0 00
capital of
selling
company
3 Excess of NIL 4,00,0 6,00,00 -
1 over 2 00 0 1,00,0
00
4 Adjustmen
t of the
above (3)
excess NIL - - NIL
against:- 4,00,0 5,00,00
Free 00 0
reserves* NIL NIL
of selling
company -
Free 1,00,00
reserves* 0
of
purchasing
company
5 Balance of
selling
company
 reserves to 5,00,0 1,00,0 NIL 5,00,0
be 00 00 00
incorporat 1,00,0
ed. 00
Free
reserves
Capital
reserves
      *Free reserves = General reserve and Profit and loss A/C credit balance.               (Excluding

Statutory Reserves)

    Journal entry in the books of purchasing company for above cases

   

Particular Debit Credit

Case I
Fixed Assets A/C      Dr 1,25,0000
Current Assets A/C    Dr  2,50,000
        To Current Liabilities 5,00,000
A/C 5,00,000
        To General Reserve  5,00,000
A/C
        To Business
Purchase A/C

Case II
Fixed Assets A/C      Dr 1,25,0000
Current Assets A/C    Dr  2,50,000
        To Current Liabilities 5,00,000
A/C 1,00,000
        To General Reserve   9,00,000
A/C
        To Business
Purchase A/C

Case III
Fixed Assets A/C      Dr 1,25,0000
Current Assets A/C    Dr  2,50,000
Profit & Loss A/C      Dr  1,00,000
        To Current Liabilities  5,00,000
A/C    NIL
11,00,000
         To General Reserve  
A/C
        To Business
Purchase A/C

Case IV
Fixed Assets A/C      Dr 1,25,0000
Current Assets A/C    Dr  2,50,000
        To Current Liabilities  5,00,000
A/C 5,00,000
        To General Reserve   4,00,000
A/C 1,00,000
        To Business
Purchase A/C
        To Capital Reserve
A/C  

Purchase Method

Under this method the assets and liabilities of the selling company are recorded by purchasing company in

either two ways

  at their existing book value;

  the purchase consideration should be allocated to individual identifiable assets and liabilities on the basis of

their Fair value(agreed value) at the date of amalgamation

1. Non- statutory reserves of selling company are not be taken by purchasing company,

2. Only statutory reserves have to be maintained by purchasing company as prescribed by the

required statute, the same is not considered for purchase consideration computation.

        Journal entry will be:-

             Amalgamation adjustment A/C   Dr    XXX

                      To Statutory Reserve A/C               XXX

  

 The difference between purchase consideration and net assets of selling  company is to be shown as follow:
 1. Where the consideration paid is less than net assets, the difference is to be credited to capital

reserves of purchasing company after amalgamation.

2. Where the consideration paid is more than net assets, the difference is to be debited to goodwill of

purchasing company after amalgamation.

Note: Net Assets = Sum of assets taken over at fair values – Liabilities taken over at agreed amounts

Let us take small illustration in various scenarios:

                              Balance sheet of selling company

Liabilities Amount Assets Amount

Share capital 500000 Fixed assets 1250000
Reserves 500000 Current assets 250000
Current Liabilities 500000
Total 150000 Total 1500000
0
          Note: Nature of amalgamation is merger     

          Consideration paid by selling company

Case I Case II Case Case

III IV
15,00, 11,00, 10,00, 4,00,0
000 000 000 00

         Computation of Goodwill/Capital reserve as per purchase method

Sl. Particula I II III IV

no r
1 Purchase 15,00,0 11,00,0 10,00,0 4,00,00
Considera 00 00 00 0
tion
2 Net assets 10,00,0 10,00,0 10,00,0 10,00,0
of selling 00 00 00 00
 company
3 Excess of  5,00,0 1,00,00 NIL -
1 over 2 00 0 6,00,00
0
4 Capital NIL NIL NIL 6,00,00
Reserve in 0
5 Goodwill 5,00,00 1,00,00 NIL NIL
0 0
      *Free reserves = General reserve and Profit and loss A/C credit balance.            

    Journal entry in the books of purchasing company for above cases

   

Particular Debit Credit

Case I
Fixed Assets A/C      Dr 12,50,000
Current Assets A/C    Dr  2,50,000
Goodwill A/C          Dr  5,00,000
        To Current Liabilities 5,00,000
A/C 15,00,000
        To Business
Purchase A/C

Case II
Fixed Assets A/C      Dr 12,50,000
Current Assets A/C    Dr  2,50,000
Goodwill A/C          Dr  1,00,000
        To Current Liabilities  5,00,000
A/C 11,00,000
        To Business
Purchase A/C

Case III
Fixed Assets A/C      Dr 1,25,0000
Current Assets A/C    Dr  2,50,000
        To Current Liabilities  5,00,000
A/C 10,00,000
        To Business
Purchase A/C

Case IV
 Fixed Assets A/C      Dr 1,25,0000
Current Assets A/C    Dr  2,50,000 5,00,000
        To Current Liabilities  6,00,000
A/C 4,00,000
        To Capital Reserve 
A/C
        To Business
Purchase A/C
      

Step 1
Identify nature of Amalgamation

If the six conditions of amalgamation in nature of merger not satisfied then it is treated as amalgamation in
nature of purchase. If the information provided in the question is not sufficient to decide the nature of
amalgamation or question is silent on the nature of amalgamation then it is better to assume the nature of
amalgamation as purchase.

Step 2

Method of accounting

 After identifying the nature of amalgamation the method of accounting is determined, it may be as follows:-
Nature of Amalgamation Method of Accounting
Merger Pooling of Interest Method
Purchase Purchase Method

Step 3

Purchase consideration

Purchase consideration is amount payable by transferee company (purchasing accompany) to transferor

company (selling company) at the event of amalgamation. The payment may be in the mode of shares,
debentures and cash. The purchase consideration may be in lump sum payment or based on net assets of
selling company.  
LUMP SUM PAYMENT/PAYMENT METHOD NET ASSETS METHOD
Aggregate of consideration paid to share holder Aggregate of assets taken over at fair value              
(equity and preference) in various forms XXX
Less:-
Liabilities taken over at agreed
 amounts                                XXX
Net assets                            xxxx
Note:- In case of pooling of interest method the 90% shareholders of selling company will get consideration
in the form of equity shares. The consideration paid by the purchase company may be in following cases
Particular Merger nature Purchase nature
Case 1 Consideration paid is more than paid up Consideration paid is more than net assets
 capital of selling company of selling company
Case 2 Consideration paid is less than paid up capital Consideration paid is less than net assets
of selling company of selling company

Step 4

Discharge of purchase consideration

Purchase consideration is discharged by transferee company(purchasing co) in various forms

After computation of purchase consideration it is discharged in the forms of shares at different values, It
may be issued by debentures and by cash etc.

Step 5

Accounting in the books of transferor company (Selling company)

The selling company has to close all accounts by transferring to realization account except shareholders
account. The shareholders account is prepaid and closed after passing necessary entries. Journal entries for
the same can be find in part – 2 of amalgamation article.click here for part 2 of amalgamtion

Note:- Before attempting the question just clarify whether there is any requirement of passing journal
entries in the books of transferor(Selling Co)

Step 6

Computation of Profit / loss in case of amalgamation for transferee company(Purchasing co)

As accounting standard 14 the profit or loss should be recognized in the following way:-

Amalgamation in the nature of

merger
Particula Amalgamation in the nature Profit or Loss
r of merger
Case 1 Consideration paid is morethan It is loss for the purchasing
paid up capital of selling company and the same
company should be adjusted against
free reserves of selling
company and purchasing
company
Case 2 Consideration paid is lessthan It is Profit for the
paid up capital of selling purchasing company and the
company same should be treated as
capital reserve in the books
of purchasing company

Amalgamation in nature of
 purchase
Particula Amalgamation in nature of Profit or Loss
r purchase
Case 1 Consideration paid is morethan It is loss for the purchasing
net assets of selling company company and the same
should be treated as goodwill
in the books of purchasing
company
Case 2 Consideration paid is lessthan It is Profit for the
net assets of selling company purchasing company and the
same should be treated as
capital reserve in the books
of purchasing company
     

Step 7
Accounting in the books of transferee (purchasing company)

Transferee company (Purchasing company) has to merge all assets and liabilities taken over at fair value.
Journal entries for the same can be find in part – 2 of amalgamation article. Click here for part -2 of
amalgamation

Note:- Before attempting the question just clarify whether there is any requirement of passing journal
entries in the books of transferee(Purchasing Co).
In the most of the questions they will ask to prepare balance sheet after amalgamation.

Let us take a small illustration:-

X Ltd and Z Ltd amalgamated on and from 1st January 2015. A new company XZ Ltd was formed to take
over the business of the existing companies.
Balance sheet as on 31.12.2014
Liabilit X Ltd Z Ltd Assets X Ltd Y Ltd
ies
Equity 60,00,00 70,00,00 Sundry 85,00,00 75,00,00
share 0 0 Fixed 0 0
capital assets
Rs.10
General 15,00,00 20,00,00 Invest 10,50,00 5,50,000
reserve 0 0 ment 0
Profit & 10,00,00 5,00,000 Stock 12,50,00 27,50,00
Loss 0 0 0
A/c
Statutor 5,50,000 2,00,000 Debtors 18,00,00 40,00,00
y 0 0
Reserve
s
12% 30,00,00 40,00,00 Bank & 4,50,000 4,00,000
Debent 0 0 Cash
ures
Sundry 10,00,00 15,00,00
 creditor 0 0
1,30,50, 1,52,00, 1,30,50, 1,52,00,
000 000 000 000
Z Ltd issued enough number equity shares for the net assets , compute purchase consideration and mode of
discharge thereof draft the balance sheet of XZ Ltd. After amalgamation.

Solution:-

Step 1:-
Nature of amalgamation
As the question is silent about nature of amalgamation, it is assumed as amalgamation in the nature of
purchase.

Step 2:-
Method of accounting
It is assumed the nature fo amalgamation is purchase then the method of accounting will be purchase
method.

Step 3:-
Purchase consideration
The information related to purchase consideration is not given in the question and it is clearly mentioned
that is discharged based on net assets of selling companies.
Computation of Net Assets
Particular X Ltd Z Ltd
Assets
Sundry fixed assets 85,00,000 75,00,000
Investment 10,50,000 5,50,000
Stock 12,50,000 27,50,000
Debtors 18,00,000 40,00,000
Cash and Bank 4,50,000 4,00,000
Total(A) 1,30,50,000 1,52,00,000
Liabilities
12% Debentures 30,00,000 40,00,000
Sundry Creditors 10,00,000 15,00,000
Total(B) 40,00,000 55,00,000
Net Assets(A-B) 90,50,000 97,00,000

Step 4:-
Discharge of purchase consideration
Purchase consideration is discharged by XZ Ltd in the forms of equity shares.
The number of shares to be issued to X Ltd is Rs.90,50,000/Rs.10=905000 shares
The number of shares to be issued to X Ltd is Rs.97,00,000/Rs.10=970000 shares

Step 5:-
Accounting in the books of transferor company (Selling company)
In the question it is not mentioned to prepare ledgers in selling company
  
Step 6:-
Computation of Profit / loss in case of amalgamation for transferee company(Purchasing co)
Amalgamation in nature of
purchase
Particula Amalgamation in nature of Profit or Loss
r purchase
1 Consideration paid is equal to No loss , No profit
net assets of selling company

Step 7:-
Accounting in the books of transferee (purchasing company)
Journal entries have not been asked for in the question.
Amalgamated Balance sheet
Balance sheet of X ltd as at 1st January 2015.
Particulars Note Amount
EQUITY AND LIABILITIES
Shareholder’s funds
Share capital 1 1,87,50,000
Reserves and surplus 2    7,50,000
Non-current Liabilities
Long term borrowings
{30,00,000+40,00,000}  70,00,000
Current liabilities
Trade payables  25,00,000
Total 2,90,00,000
ASSETS
Non-current assets
Fixed assets
[85,00,000+75,00,000] 1,60,00,000
Non-Current Investment
[10,50,000+5,50,000] 16,00,000
Non-current assets(amalgamation adjustment)  7,50,000
Current assets 40,00,000
Inventories[12,50,000+27,50,000] 58,00,000
Trade Receivables[18,00,000+40,00,000]
Cash and Cash Equivalent  8,50,000
[4,50,000+4,00,000]
Total 2,90,00,000

Notes to the financial statements

Share capital
Particular Amount
Authorised
Issued, subscribed and fully paid up
18,75,000 equity shares of Rs.10 each 1,87,50,000

Reserves and surplus

Particular Amount
Statutory reserves 7,50,000

AMALGAMATION :- JOURNAL ENTRIES IN THE BOOKS OF TRANSFEROR AND

TRANSFEREE COMPANY

ACCOUNTING FOR AMALGAMATION PART-II

Amalgamation means the liquidation of one or more companies and transfer of business of liquidated

entities to another entity. There may be amalgamation either transfer of two or more undertakings to an

existing company or new company.

JOURNAL ENTRIES IN BOOKS OF TRANSFEROR COMPANY AND TRANSFEREE COMPANY

IN THE BOOKS OF TRANSFEROR COMPANY(SELLING COMPANY)

Accounting standard 14 is not applicable for selling company.

Accounting is done with the objective of closing books of accounts and simultaneous determination of profit

or loss on closing books of accounts.

  Transfer to realization account

SL.NO PARTICULAR DEBIT CREDIT

1 Transfer all Assets at book value to realization a/c ( except
Miscellaneous)
   Realisation A/C           Dr XXX
          To Assets A/c XXX
2 Transfer all liabilities taken over purchasing
company(Except equity, preference and reserves)
   Liabilities A/c           Dr
         To Realisation A/c XXX
XXX

  PURCHASE CONSIDERATION

  Purchase consideration represents consideration paid in cash, shares,              debentures etc.

SL.NO PARTICULAR DEBIT CREDIT

1 Due entry for consideration
  Transferee company A/C           Dr XXX
          To Realisation A/c XXX
2 Receipt of consideration
Shares/Cash A/c           Dr XXX
     To Transferee company A/c XXX

SALE OF ASSETS NOT TAKEN OVER BY PURCHASING COMPANY

SL.NO PARTICULAR DEBIT CREDIT

1 Sale with assuming profit
  Bank A/C           Dr XXX
       To Assets A/C(book value)      XXX
       To Realisation A/c(Profits) XXX
2 Sale with assuming loss
Bank A/c                  Dr XXX
Realisation A/c(loss)      Dr XXX
     To Assets A/c(Book Value) XXX

SETTLEMENT OF LIABILITIES NOT TAKEN OVER BY PURCHASING COMPANY

 SL.NO PARTICULAR DEBIT CREDIT
1 Settlement with assuming at discount)
  Liabilities A/C           Dr XXX
       To Bank A/C(book value)      XXX
       To Realisation A/c(Profits) XXX
2 Settlement with assuming at loss
Liabilities A/c                  Dr XXX
Realisation A/c(loss)      Dr XXX
     To Bank A/c(Book Value) XXX

 Realisation Expense

SL.NO PARTICULAR DEBIT CREDIT

1 Incurred by transferor(Selling Co.) company
Realisation A/c XXX
     To Bank A/c XXX
2 Incurred by transferee(purchasing Co.) company
             NO ENRTY NIL NIL
3 Incurred by transferor(Selling Co.) company
Reimbursed by transferee company
Transferee company A/c    Dr XXX
        To Bank A/c XXX
On Reimbursement
   Bank A/c                Dr XXX
      To Transferee company A/c XXX

 AMOUNT DUE TO EQUITY SHAREHOLDERS

SL.NO PARTICULAR DEBIT CREDIT

1 Transfer of share capital and reverse to
shareholders account
Equity Share capital   A/c     Dr XXX
Reserves   A/c                Dr XXX
        To Shareholders A/c XXX
2 Transfer of balances in realization account
Realisation A/c (Profit)        Dr XXX
     To shareholders A/c XXX
In Case of loss
 Shareholders A/c           Dr XXX
        To Realisation A/c (Loss) XXX

  SETTLEMENT TO SHAREHOLDERS BY TRANSFER OF CONSIDERATION      RECCEIVED

SL.NO PARTICULAR DEBIT CREDIT

1 Shareholders A/c       Dr XXX
     To shares of transferee company A/c XXX
     To Bank   A/c XXX

IN THE BOOKS OF TRANSFEREE COMPANY(PURCHASING COMPANY)

Accounting should be done as per accounting standard 14.

Accounting standard classifies amalgamation for the purpose of accounting into two types:
   Amalgamation in nature of merger

  Amalgamation in nature of purchase

Depending upon nature of amalgamation the method of accounting is decided

Method of Accounting

Nature of Amalgamation Method of Accounting

Merger Pooling of Interest Method
Purchase Purchase Method

Journal Entries in case of purchase

  Due entry for business purchase

SL.NO PARTICULAR DEBIT CREDIT

1 Business Purchase A/c       Dr XXX
     To Liquidator transferor company A/c XXX

 Incorporation of assets and liabilities taken over

SL.NO PARTICULAR DEBIT CREDIT

1 Sale consideration more than net assets of selling
company.
Assets A/c       Dr XXX
Goodwill A/c     Dr(Bal.Fig) XXX
     To Liabilities A/c XXX
     To Business Purchase A/c XXX
2 Sale consideration less than net assets of selling company.
Assets A/c       Dr
     To Liabilities A/c XXX
     To Business Purchase A/c XXX
     To Capital Reserve A/c (Bal.Fig) XXX
XXX

  Sale consideration - net assets of selling company = positive amount =             Goodwill (loss to

purchasing Company)

  Sale consideration - net assets of selling company = Negative amount =             Capital Reserve (profit

to Purchasing company)

DISCHARGE OF PURCHASE CONSIDERATION

SL.NO PARTICULAR DEBIT CREDIT

1 Liquidator of transferor company A/c       Dr XXX
     To Share capital A/c XXX
     To Securities premium A/c XXX
     To Bank A/c        XXX
OTHERS

SL.NO PARTICULAR DEBIT CREDIT

1 Cancellation of inter company owings
Creditors A/c             Dr XXX
   To Debtors       XXX
2 Elimination of unrealised profits on goods sold by one
company to the other and remaining unsold on the date of
amalgamation
Goodwill/Capital reserve A/c            Dr XXX
     To Stock reserve/Stock A/c XXX
3 Realisation expense
Incurred by purchasing company
Goodwill/Capital reserve A/c            Dr XXX
      To Bank A/c XXX
Realisation incurred by selling company
   NO ENTRY NIL NIL

Realisation expense by selling and the same was

reimbursed by purchasing company
Goodwill/Capital reserve A/c            Dr XXX
      To Bank A/c XXX

Contra entry for statutory reserve appearing in selling company and the same to be maintained

by purchasing company.

SL.NO PARTICULAR DEBIT CREDIT

1 Amalgamation Adjustment A/c       Dr XXX
     To Statutory reserve A/c XXX