Introduction

When a company just acquires another company but does not amalgamate that company within itself, the shares purchased from the promoters and other shareholders are shown as investment in the acquirer companys books and are accounted at the cost at which they were acquired. In the target companys books no adjustment is required at all.

ACCOUNTING STANDARD 14
The Standard deals with accounting for amalgamations and the treatment of any resultant goodwill or reserves. The Standard does not deal with cases of acquisition which arise when there is purchase by one company (referred to as the acquiring company) of the whole or part of the shares, or the whole or part of the assets of another company (referred to as the acquired company) in consideration for payment in cash or by issue of shares or other securities in the acquiring company or partly in one form and partly in the other.

CLASSIFICATION OF AMALGAMATIONS

Amalgamation by way of Merger

Amalgamation by way of Purchase

Amalgamation by way of Merger

Five Preconditions for Merger:
All assets and liabilities of the transferor company become, after amalgamation, the assets and liabilities of the transferee company. Shareholders holding not less than 90 percent of the face value of the equity shares of the transferor company (other than the equity shares already held by the transferee company or its subsidiaries or nominees) become the equity shareholders of the transferee company by virtue of the amalgamation.

The consideration for amalgamation received by those equity shareholders of the transferor company who agree to become the shareholders of the transferee company is discharged by the transferee company wholly by the issue of equity shares in the transferee company, except that cash may be paid in respect of any fractional shares.

Conti
The transferee company intends to carry on the business of the transferor company after the amalgamation.

No adjustment is intended to be made in the book value of the assets and liabilities of the transferor company when they are incorporated in the financial statements of the transferee company except to ensure the uniformity of accounting policies.

Amalgamation by Way of Purchase

An amalgamation in which any one or more of the five conditions mentioned earlier are not satisfied, then it is considered as amalgamation by way of purchase.

METHODS OF ACCOUNTING

Pooling of Interest Method

Purchase Method

Pooling of Interest Method

In case of an amalgamation by way of merger, the method prescribed is known as pooling of interests method. Under this method following norms are required to be adhered to: In preparing the transferee companys financial statements, the assets, liabilities and reserves of the transferor company should be recorded at their existing carrying amounts and in the same form as at the time of amalgamation. Even the reserves under various heads in the transferor companys books have to be accounted under the same heads in the transferee companys books. Thus, revaluation reserves of the transferor company will become or get added to the revaluation reserves of the transferee company and so on. The difference between the amount recorded as the share capital issued (plus any additional consideration in the form of cash or other assets) and the amount of share capital of the transferor company should be adjusted in reserves.

Purchase Method
In amalgamation by way of purchase, while preparing financial statements, the transferee company is required to follow the purchase method of accounting. Under the purchase method following norms are required to be adhered to:

A.

With regard to assets and liabilities, the transferee company can (a) record the assets and liabilities of the transferor company at their existing carrying values, i.e., book values or (b) allocate the consideration to the individual identifiable assets and liabilities on the basis of their fair values at the date of amalgamation.

Conti
B.
With regard to the reserves of the transferor company (whether

capital or revenue), the transferee company should not include them in its books. Only exception to this is the statutory reserves such as debenture redemption reserves, which have to be shown in the transferee companys books under the same account heads and at the same values as appearing in transferor companys books at the time of amalgamation.
On the other hand, any excess of the consideration over the value of the net assets of the transferor company acquired by the transferee company should be recognized in the transferee companys financial statements as goodwill arising on amalgamation; whereas, if the amount of the consideration is lower than the value of the net assets acquired, the difference should be treated as capital reserve.

Accounting for Demerger

The ICAI has, as yet, not prescribed any accounting standard for demerger. However, ironically, the Income Tax Act, 1961, has defined the accounting norms for demerger.

Accounting for Demerger

The Act stipulates that all the assets and liabilities of the undertaking being demerged must be transferred to the resulting company and must be transferred at book values only. If any asset of the undertaking being demerged has been revalued, such revaluation needs to be ignored. This means that while transferring to the resulting company the assets of the undertaking being demerged, which were earlier revalued, have to be restated at cost (less accumulated depreciation in case of fixed assets). A peculiar situation would, however, arise if the company has already capitalized these reserves by the issue of bonus shares. In such a case, the transferor company would end up adjusting the diminution in the value of assets against its general reserves.

Conti
Transfer of Liabilities and Loans
Specific liabilities of the undertaking being demerged have to be transferred to the resulting company. Specific loans or borrowings including debentures raised, incurred and utilized solely for the activities and operations of the undertaking being demerged have to be transferred to the resulting company. Common loans and borrowing have to be apportioned to the resulting company in the same ratio as the book value of the assets transferred to the resulting company bears to the total book value of the assets of the demerged company prior to demerger.

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