Business Combinations

Recap and Overview Amalgamation Absorption Re-construction Summary

Overview
Amalgamation
A +B = C

Absorption
a+b=A

Reconstruction
Companys Capital is Re-organised

Amalgamation
Companies Being Amalgamated are Shut Down & New Company Opened. 2 Stage Accounting Process: Shut Down & Opening. Purchase Consideration
Payment in Cash, Shares in New Company, Asset Take Over, Etc

Steps in Shut Down

Purchase Consideration = Fair Value of Assets (including Goodwill) Fair Value of Liabilities.
1. Take Over of Assets*
Dr Realisation A/c CR Individual Asset A/c *Cash/Bank Transferred If No Cash Payments Required (e.g. Realisation Exp & Purchase Consideration

Shut Down
Sale of Assets Not Taken Over
Dr Bank Cr Asset

2. Take Over of Liabilities

Dr Liabilities Cr Realisation Payment of Liabilities Not Taken Over Dr Liabilities Cr Bank

Steps in Shut Down

3 Recording Purchase Consideration
Dr New Company A/c Cr Realisation A/c

4. Payment of Realisation Expenses

Dr Realisation A/c Cr Bank

Shut Down
5. Transfer of Realisation Profit or Loss
Balancing Figure in Realisation A/c Transferred to Shareholders A/c Dr Realisation ( or Shareholders) Cr Shareholders A/c (or Realisation)

Shut Down
6. Receipt of Purchase Consideration
Dr Bank/Shares/Debentures in New Co. A/c Cr New Company A/c

7. Closing Share Capital & Reserves A/c

Dr Share Capital & Reserves A/cs Cr Shareholders A/c

Shut Down
8. Paying off Shareholders
Dr. Shareholders A/C Cr Bank/Shares/Debentures in New Company. All A/c Now Shut Down

Opening New Co.

1. Recording Purchase Consideration
DR ACQUISITION OF X (BUSINESS BEING TAKEN OVER) CR LIQUIDATORS OF X

2. Recording Assets Taken Over

DR INDIVIDUAL ASSET ACCOUNTS CR ACQUISITION OF X

Opening
3. Recording Liabilities Taken Over
DR ACQUISITION OF X CR INDIVIDUAL LIABILITIES

4. Payment of Purchase Consideration

DR LIQUIDATORS OF X CR BANK/SHARE CAPITAL/ DEBENTURES/ SHARE PREMIUM

Absorption
Similar to Amalgamation Except No New Company Formed.
Assets & Liabilities Taken Over Are Transferred to Existing Accounts in Company Taking Over Other(s) Accounting Procedures to Shut Down Companies Being Taken Over are Same as For Amalgamation

Reorganisation
Internal Reconstruction of Capital Structure. (Shrinking the Firm)
Reduce Capital Structure to Eliminate Losses & Turn Fortunes Around Results in Smaller Capital New Look Slim Company Rather than New Company Emerges

Reorganisation
Approaches/Options
Eliminating or Reducing Shareholders Liability on Unpaid Up Share Capital.
Amounts Unpaid Are Written Off or Down

Paying Off Surplus Share Capital. Cancelling Paid Up Share capital Not Represented by Assets. Revaluing Assets* Reducing Creditors Claims

Reorganisation
Accounting Procedures
Amounts Written Off Are Transferred to Reorganisation Account Balance in the Reorganisation Account Capitalised and Amortised Over Agreed Period. i.e Profit/Loss on Reorganisation Reported as Capital Reserve and Will be Written Off Over Agreed Period of Time

Reorganisation
Common Accounting Entries. 1. Reducing Share Capital
Dr Share Capital Cr Reorganisation A/C

2. Writing Off Excess Asset Values*

Dr Reorganisation Cr Asset A/c * Adjustment to Carrying Cost

Reorganisation
3. Paying Off Excess Share Capital
Dr Share Capital Cr Bank

4. Reducing Liabilities
Dr Creditors Cr Reorganisation

5. Writing Off Losses

Dr. Reorganisation Cr Profit & Loss

Reorganisation
6. Issue of Shares as Payment for Liabilities Dr Liabilities Cr Share Capital 7. Conversion of Pref Share Capital to Ordinary Share Capital a. Dr Pref Share Capital Cr Reorganisation b. Dr Reorganisation Cr Ordinary share Capital

Reconstruction
Existing Company Shut Down & New One Formed With New Look Capital Structure. Assets & Liabilities Of Shut Down Company Taken Over by New Company Shut Down Entries Similar to Amalgamation. Issue of Shares/Acquisition of Loans in New Company Follow Known Procedures

Summary
Amalgamation V/s Absorption Reorganisation V/s Reconstruction